This article is from the WeChat account “Genki Capital”.

Core content

1. What is the turning point of Anta's move towards multi-brand management?

2. What strategic changes have taken place within Anta during the transformation?

3. What increases will the acquisition of Amer Sports bring to Anta?

If divided by market capitalization, among global sportswear companies,Anta Sports(02020) Ranked fourth in the world with HK$355.8 billion. The company's market capitalization isLi Ning2.6 times that, and it is also one of the most profitable clothing companies in China. For the same period in January 2019, Anta's stock price was around HK$35. By the close of trading on January 19 this year, the company's stock price had exceeded HK$140, four times that of two years ago.

From a small factory in Jinjiang in 1991 to a Hong Kong listing in 2007, which set the record for the highest price-earnings ratio and financing amount in China's sporting goods industry, Anta continues to write its own “myth.” Since listing, the stock price has risen 15 times, and revenue and net profit have increased more than 8 times. Perhaps only Lululemon can compare this growth line to this in the world, but the two are completely different business entities.

Regarding Lulu, our previous study “Lululemon: The Underlying Logic of the Rise of a Yoga Pants” found that the logic that actually supports its strong valuation is not simply fabric and technology; what the market more recognizes is its consumer-facing marketing system.

But what about Anta? How has the company's underlying business model changed after using the “multi-brand matrix strategy”? What are the company's core competencies during the transformation process?

1 inflection point: Anta acquires FILA

Last week, Anta Group announced the turnover for the fourth quarter and full year of 2020. The main brand ANTA resumed low unit growth in the fourth quarter and recorded negative mid-unit growth throughout the year; the brand FILA maintained positive growth above the middle double digits for five consecutive years.

Notably, the company's other brands, such as Descente (Descente), achieved double-digit growth of 55%-60% in a single quarter and achieved 35-40% growth throughout the year.

When FILA replaced the main support position of Anta's main brand (6.777 billion) with sales of 7.152 billion in the third quarter, it already attracted market attention, and Anta's acquisition of FILA also almost formed the most classic case of mergers and acquisitions in the local textile and garment sector.

When the 2008 Olympics had just subsided, local brands including Anta, Li Ning, and TEP all developed ambitions to compete in overseas markets, and Anta took the lead in sending a signal to the market that “it will acquire an overseas sports brand.”

At the time, there were many sports brands that were reasonably valued internationally, and And1 and Reebok all excelled in their respective segments. Surprisingly, however, on August 12, 2009, Anta bought all of FILA's business in the Chinese market from Belle International for RMB 314 million. Investors, media, and industry operators concerned about this matter felt incomprehensible.

The market is not denying FILA's brand value; rather, the continuous decline in performance since 2000 and the gradual loss of market competitiveness made it look like a “hot potato.” Even though Anta had one of the best offline channels at the time, its ability at the distribution level was not as good as Belle International.

Genki Capital believes that the reason FILA did not become the “key to opening up overseas markets” as described by Ding Shizhong (current Chairman of the Board of Directors and CEO of Anta Group) is the root cause of deepening the domestic market and becoming the second growth curve, stemming from Anta's renewed position on FILA.

This was Anta's first merger and acquisition, and despite its lack of experience, Anta maintained enough awe. At the time, under the influence of the “Olympic wave,” Li Ning, Special Step,361 degreesOther local brands are increasing the field of professional sports in response to adopting aggressive market strategies to enter overseas brands in China.

However, by reorganizing the market, Anta has keenly discovered gaps in the sports and leisure market segment. According to Euromonitor data, the penetration rate of consumers actually participating in sports in the 2008 “National Olympics” domestic market was less than 35%, and the casual orientation of the scene where more people wore sportswear was greater than the functional orientation.

In other words, the demand for sportswear in the market back then came more from “looking like sports” rather than actually liking sports. Of course, the comfort and leisure of sportswear (that is, it is more suitable for the scene) also forms the main demand for sportswear.

Previously, FILA's business difficulties in the Chinese market were largely due to Belle International's common problems in acquisition initiatives — that is, mispositioning the product. A team that had just been formed for a year took over FILA, classified the brand as a “second-class brand” under its women's shoes business, and blindly expanded the store, which eventually led to an inventory backlog.

In addition to this, international giants such as NIKE are fiercely competing in the local first and second tier markets, and Anta's main brand (ANTA) is rooted in third- and lower-tier cities. There is an urgent need for new product lines that are not influenced by the main brand to “line up” with NIKE and Adidas in the first and second tier markets to find products and brands positioned at the middle and high-end, which became a must for Anta at the time.

FILA is a “relatively cheap” choice that fits the position and is “relatively cheap”, so Anta won in one fell swoop.

2 A key competency for success

Why can Anta make FILA, but Belle International can't? In addition to issues at the level of accurate positioning, there is also strong operational capability.

Anta's business model is a sales-oriented company. Its barriers are always reflected in two levels: terminal retail management capabilities and supply chain control capabilities.

Compared with other sportswear brands in the same period, Anta in 2008 has an extremely impressive financial data. R&D expenses accounted for 3% of sales (less than 2% for Li Ning during the same period), and continuous investment in R&D funds ensured that Anta continued to launch new products — in 2008 alone, Anta launched 2,200 new shoes, 2,500 clothing, and 200 accessories, which means that an average of 6 new shoes were launched every day.

If you take a closer look, an important brand building logic of the time was an “imitator.” The purpose of the high investment in R&D was to meet the strategy of imitation of all categories at the time, rather than actually being “technology-oriented.” From imitating Li Ning's endorsement model of hiring professional athletes to imitating Nike's all-sports coverage model, Anta “crudely” launched 15 different sneakers for as many as 15 sports categories, which not only has strong cash flow, but also revealed the problem that Anta lacks core support categories.

However, since FILA was incorporated, Anta's overall operating logic began to shift from the “brand wholesale” stage to “direct retail management”, and finally established FILA's “full direct management model” strategy. The premise of this model was to consolidate the ability to integrate and manage the supply chain and retail terminals. Until now, Anta had little experience in this area.

After the Olympic wave, the entire sportswear market entered an adjustment period facing a backlog of inventory. In 2012 and 2013, Anta's main business revenue increased by -14.4% and -4.5%, respectively, and the number of inventory turnover days also rose sharply, from 37.5 days in 2011 to 49.7 and 58.4 days in 2012 and 2013. At the same time, stock prices also fell to a low point. The PE level in 2012-2013 was below 11 times for most of the time, and the lowest was even less than 5 times.

Anta's strategy began to focus on refined brand retail strategies, such as establishing an ERP follow-up management inventory system, changing the distribution order model to a single store order model, etc. In this context, Yao Weixiong, who is currently in charge as FILA's CEO, has formulated FILA's “full direct management model.”

Transforming FILA from the original distribution model to a direct management model and returning the brand positioning to fashion, Yao Weixiong said bluntly, “Choosing direct management is more tiring, but it takes more time and effort to set up a larger team. However, they can independently control the entire industry chain on their own. Although the net profit margin of doing direct sales will be lower than that of wholesale, it doesn't depend on the profit margin but on the sum of profits. Which one is more viable and more stable?”

Ding Shizhong also said in an interview, “We will no longer sell using the traditional wholesale model. The most important thing for a brand is to master the implementation of standards, so implementing standards will have a certain cost. We've now made one thing clear: if dealers can't live up to the brand's standards, we'd rather do less business or even not do it.”

The core of so-called retail orientation is nothing more than strengthening control over retailers. More specifically, it is breaking the original organizational structure, abolishing the division of sales regions and changing the customer system to push managers to the front line without connecting with each dealer through the three regions of North, East, and South, but directly managing more than 7,000 stores across the country through dozens of dealers.

The final results were remarkable. Judging from the order fair data disclosed at the time, Anta's order fair data for the first quarter of 2014 (released in August 2013) had already changed from negative to positive, and continued to show high unit growth over the next few quarters. Other competitors, such as TEP, remained flat until the end of 2014. Li Ning did not disclose the order fair data, but judging from the growth rate of revenue and net profit, it was only officially recovered after 2015. As can also be seen in terms of revenue, it was only in 2012 that Anta surpassed Li Ning in the true sense of the word to become number one in the industry.

In 2016, e-commerce became popular, and Anta's strategy once again entered a new stage, officially launching the core strategy called “Single Focus, Multiple Brands, and Omnichannel”.

The beginning of this phase was also initiated by acquisitions. Descente (Descente) and Sprandi (Sprandi) are also at operating losses in their respective segments, but their market share remains under the revenue category of second-tier international brands.

Immediately after that, they signed another contract with the Chinese Olympic Committee and the Beijing Organizing Committee in 2017 to become the official partner of the 2022 Winter Olympics. In the same year, the two brands Kolon Sport (Kolon Sport) and Kingkow (Kingkow) were once again sold separately for outdoor sporting goods and children's clothing.

At the strategic level, the purpose of this stage is to achieve coverage of the empty market, but at the business level, since the focus is driven by the division of online and offline, these four brands did not experience “meticulous refinement” like FILA after the acquisition, and in a sense were temporarily shelved.

As mentioned earlier, the essence of Anta is sales-oriented, rather than actually trying to operate an incubation base for many successful brands, so when they realized the impact of e-commerce on traditional retail, it was really unexpected to abandon car maintenance.

In 2014, Anta Group's online sales accounted for only 4%, but by 2018, it had rapidly climbed to around 15%. Interestingly, when increasing e-commerce, Anta's main brand chose the method of differentiated online and offline supply (the overlap rate of the same product of the same price online and offline is only 20%, and online is mainly dedicated payments). The aim was to drive traffic to online through the differentiation of online products, which also laid hidden worries for the future.

In order to meet the needs of more brand management, Anta has once again adjusted its organizational structure, adjusted the previous separate brand management model to a classified business group management model, and redivided into three brand business groups, and set up separate CEOs, which are the outdoor sports brand group, the professional sports brand group, and the fashion sports brand group.

Including Descente, Kolon's strategic division and Amer Sports, the latest merger and acquisition, formed an outdoor sports brand group, with Zheng Jie, executive director of Anta Group and CEO; a professional sports brand group composed of Anta's main brand, Anta Kids, AntaPlus, and Spandy, is responsible for Anta Executive Director and Sales President Wu Yonghua. Among them, basketball, comprehensive training, running, and sports life all set up separate category divisions; including FILA and FILA Kids, which are also subdivided into FILA Fashion Sports (FILA) and Trend Sports (FILA) FUSION) and FILA ATHLETICS (FILA ATHLETICS) formed a fashion sports brand group, with Yao Weixiong, the former president of FILA Greater China, as CEO.

After a more internet-based structural adjustment, Anta's brands officially showed a trend of hierarchical break-even.

Judging from FILA's performance in 5 years to reach break-even, Anta's strategy on how to replicate the brand's success has gradually matured. Descente achieved break-even at the end of 2019, and it took about 3 years since the acquisition. According to management's predictions, Kolon will be the next brand to achieve break-even and is currently in the process of reorganizing the brand positioning and team; Sprandi and Kingkow are still in the process of being shaped.

Under the health incident, the marketing models of global sportswear brands have all been tested. The reason why Anta's main brands have been seriously affected is that the online and offline “two-item” model has made it impossible to coordinate the overall situation, and both gross profit and operating profit have declined by double digits.

Since FILA initially implemented a full direct management model, when offline stores were closed, it moved flexibly to use e-commerce revenue to increase by more than 100% year-on-year, driving positive revenue and gross profit growth, diluting the negative impact of offline obstruction, and operating profit declined only in units.

Currently, global sportswear brands are beginning to shift to the era of direct management with the DTC (direct to customer) model as the core. In layman's terms, this model is a direct management model combined with data management.

For “old” brands that spent decades opening up distribution channels in the early stages, it is not difficult to understand the importance of “data”; how to combine it organically with their own architecture is the difficulty.

Anta announced the DTC plan in August 2020. It is expected that 3,500 stores will be upgraded. Of these, 60% of stores will be directly managed, and 40% of store franchisees will operate in accordance with Anta brand operating standards.

Back to the original question, why Anta?

After sorting and analyzing, according to Genqi Capital's opinion, the point where Anta won locally was the retail transition period we mentioned (2013). In this period, Li Ning chose to target younger consumers but did not bring matching product designs, and even lost competitiveness in third- and fourth-tier cities due to price increases; while XTEP is a typical example of being left behind due to excessive focus on distribution. The management mainly focused on distributing discounts and transferring inventory. The product and marketing side gradually fell behind.

Meanwhile, in the single-brand and omni-channel stage, Nike was overtaken by Adidas for a while because it did not even judge the trend of fashion sports, and both revenue and net profit slowed down. In contrast, Anta took advantage of FILA.

With the advent of the DTC direct management era, we judge that market competition will once again intensify. On the one hand, overseas brands are rapidly penetrating the local market, and on the other hand, overseas brands are connecting with each other in more market segments. Can Anta take the top three positions in the world? On the scale of victory, the “outdoor category” will become a new weight.

3 What increases can Amer Sports bring?

From a macro perspective, after the 20th century, demand for sports gradually diversified, and market segments exploded. UA in the fitness field, Lululemon (LULU.US) for women's yoga, and Skechers for urban walking all set off considerable growth momentum.

In the short term, Descente does have the potential to become the “next FILA”. On the one hand, at the beginning of the bid for the Winter Olympics, the country put forward the slogan “300 million people on ice and snow.”

According to the “National Ice and Snow Stadium Facility Construction Plan (2016-2022)” issued by the State Administration of Sports, the number of ice skating rinks nationwide will be no less than 650, of which no less than 500 will be built; the number of ski resorts will reach 800, the area of snow trails will reach 10 million square meters; and there will be 45 towns with ice and snow characteristics by 2022. Supported by policy dividends, the scale of China's ice and snow industry is expected to reach 1 trillion yuan in 2025, driving an increase in demand for ski apparel and supplies. (Data source: 2018 China Ice and Snow Industry White Paper)

On the one hand, Descente's product line also covers a large number of fitness fields. In particular, the women's fitness scene will also see considerable growth.

However, we think the more core and long-term increase comes from Amer Sports, which set the largest merger and acquisition amount of 37 billion yuan in the Chinese apparel industry in 2018.

Amer Sports' main revenue comes from overseas, and there is almost no overlap with Anta, so it can form complementary categories and channels. At the same time, by integrating Amer Sports' procurement and supply resources, Anta can further develop the advantages of management collaboration, cooperate with its global supply chain platform, and lay a good foundation for Anta's overseas supply chain expansion.

If you take a closer look, you'll find that Amer Sports is a very interesting company, located in Northern Europe, whose main business is tobacco. It consists of four education-oriented organizations (the Finnish Association of Bachelor Engineers, the Finnish Association of Economics and Business Administration Graduates, the Land and Water Technology Foundation, and the Helsinki School of Economics and Business Administration Student Union), but now it is the world's top sports equipment brand management company.

Its brand matrix is quite luxurious, including Canadian luxury outdoor equipment brand Arc'teryx (Arc'teryx), French mountain outdoor cross-country brand Pheromone (Salomon), American tennis equipment brand Wilson, Austrian ski equipment brand Atomic, its cycling equipment and clothing brand Mavic, Finnish sports watches and other outdoor equipment brand Suunto (Precor).

Although Anta has the experience of successfully integrating FILA, the key point of integrating FILA is how to operate FILA to become a revenue growth point, rather than the cross-sector brand image that Anta wanted when it acquired Amer Sports. After the merger and acquisition, Anta Group's brands expanded dramatically, and the difficulty of collaborative management of multiple brands also increased sharply.

In fact, as can already be seen from Anta's brand trapezoid state of achieving break-even, the group's management did not have a long time to accumulate and reserve multi-brand groups and internationalization. Whether it is possible to take advantage of the synergy effects after the acquisition is completed is a huge challenge for Anta.

However, judging from the announcement, Amer Sports still operates independently, and is itself a highly compatible multi-brand platform.

Judging from the diversification process disclosed on its official website, this is a typical investment group company that uses diversified management strategies. It has no outstanding management capabilities and no hard core technical strength, but it is outstanding in terms of mergers and acquisitions integration capabilities.

Prior to 1999, Amer Sports's acquisition focused on the paper and textile industries, and it wasn't until after acquiring outdoor and diving equipment manufacturer Suunto that it gradually divested other businesses and focused on the sports sector.

Genki Capital collated its mergers and acquisitions situation and found that Amer Sports' merger and acquisition logic focuses on leveraging brand synergy effects. It basically operates through agency operations. It is a company that is good at integration and knows how to operate a brand matrix strategy.

Notably, Anta's acquisition of Amer Sports was a premium acquisition. At the time of the purchase, Anta offered a price of €40 per share, while the market assessed the company's share price at only €30 at the time. In addition, Amer Sports's business situation at the time was not optimistic, and it was burdened with huge debts. Over the past few years, the development of Amer Sports has been slow. In 2016-2018, the company's revenue growth rate was only 3.5%, -1.8%, and 4%, and the net profit growth rate declined year after year, with growth rates of only 7.7%, 6.9%, and -4.7%.

What is the difference between Anta and Nike and Adidas? The answer is simple: technological content.

Fashion and high-end positions cannot replace the technological attributes behind the “professional equipment” position. Anta, which is quite strong in terminal management and the local supply chain, and even other domestic sports brands are weak in terms of technological functional products.

The acquisition of Amer Sports will largely improve this situation. First, Amer Sports' brands are the most professional leaders in various fields, greatly filling the gap in Anta's “professional” quadrant; secondly, Amer Sports' accumulated product technology reserves and high-quality supply chain resources over the years are also the key to its “professional” attributes. Amer has more than 200 core suppliers around the world, and long-term partnerships are stable. In terms of product production regions, China, Europe/Middle East/Africa, America and other Asia-Pacific regions account for 22%, 28%, 12% and 38%, respectively, and the global production capacity is evenly distributed; in terms of product production methods, in-house production, mixed production and outsourced production methods account for 24%, 64%, and 12%, respectively. The proportion of own production is high, and top supply chain resources are abundant.

Amer had a high R&D cost rate of 3% or more in 2014-2019. Taking Arc'teryx (Archaeopteryx) as an example, it has cooperated with W.L. Gore (parent company of Gore-tex materials) since 1998. Furthermore, Gore's environmental testing laboratory can even simulate the environment of any mountain in the world, which allows Arc'teryx products to always be at the forefront of the industry and enjoy an excellent reputation among consumers.

Against the backdrop of the global outdoor sporting goods market beginning to recover in 2018, Genqi Capital believes that Amer Sports' relative stagnation in recent years is related to factors such as insufficient brand focus, insufficient overall investment, relatively conservative strategies, and slow internal decision-making. The company's relatively conservative investment in the Asia-Pacific market, particularly in China, reflects the problem from the side. In terms of capital expenditure, it has accounted for about 10% of the amount each year since 2014, and even decreased by 0.7 percentage points year on year in 2018, which is far worse than America and Europe/Middle East/Africa.

Therefore, Anta will use Amer Sports outward, and the latter will use Anta inward. This will be an important logic for us to observe the market for the next 3-5 years. For Anta, it is also worth paying attention to whether it is possible to develop differentiated positioning and brand strategies for each brand based on the characteristics of the Chinese market and ultimately replicate the success of FILA.

Furthermore, Amer Sports has signed an asset sale agreement with Peloton (PTON.US), an American smart sports equipment company that caught fire during the health incident, on the Precor (Precor) brand. Whether Anta and Peloton can have further cooperation has also brought rich room for imagination to the market.

(Editor: Yu Jing)