E-Commerce Trips Up Li Ning

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Li Ning’s profit tumbles

Former gymnastics star Li Ning (HKEx: 2331) may have won Olympic gold, but he’s quickly finding a formidable rival in China’s e-commerce revolution that is rapidly stealing business from his sportswear empire. That’s my major takeaway from Li Ning’s latest abysmal results, which include a massive 1.98 billion yuan ($318 million) loss for 2012, the company’s first annual loss since going public in 2004. (English article)The loss was driven by a 24.5 percent tumble in revenue, as Li Ning stores found themselves sitting on piles of unsold T-shirts and running shoes that nobody wanted. But Li Ning is hardly alone in its misery, with most of its other top traditional retailing rivals also posting sharp revenue declines last year.

Anta (HKEx: 2020) saw its revenue slip 14.4 percent, while Peak Sport Products’ (HKEx: 1968) revenue tumbled 37.5 percent. The only major domestic player to avoid a decline was Xtep (HKEx: 1368), but even its revenue was only flat for the year. And the retailing woes weren’t limited to sportswear, with former electronics retailing high-flyer Gome (HKEx: 493) also posting a massive loss of nearly 600 million yuan for the year, also its first ever annual loss since going public. (Chinese article)

Near all the stumbling retailers have embarked on massive store-closing campaigns as sales tumble, with most blaming their woes on China’s weakening economy and their inability to correctly forecast consumer trends. Those reasons may be partly to blame, but from my perspective the bigger common factor uniting all of these companies was their inability to predict the rapid rise of e-commerce in China.

These traditional retailing giants did little or nothing to develop their online business over the last few years, with the result that none are now recognized as e-commerce leaders in their sector. Meanwhile, more tech-savvy names like Alibaba’s TMall, Vipshop (NYSE: VIPS) and Vancl have seen their fortunes soar as they steal business from the traditional retailers.

Vipshop best reflects the trend, with its shares up 6-fold since September alone as its revenue posts strong growth and the company moved into the profit column. By comparison, Li Ning’s shares are down by about half over the last year, as it embarks on a campaign that has seen it close 1,821 stores last year, or more than a fifth of its total.

I find it amusing that all of the companies are blaming the economy and overambitious expansions for their woes, when clearly the e-commerce effect is one of the main culprits behind the steep double-digit revenue declines. Most of the big names have finally woken up to the e-commerce threat and are building up websites to try to compete.

But I suspect their efforts may be too little too late. In announcing its results, Li Ning predicted the first half of 2013 could be a difficult period, but that its fortunes could start to reverse in the second half of the year as China’s economy starts to pick up. If I were a betting man, I would say the woes at Li Ning, Anta, Gome and other traditional retailing giants could last much longer. At the end of the day, perhaps only 1 or 2 of these major names will survive the current e-commerce transformation now sweeping China to remain major players in the next decade.

Bottom line: Li Ning’s massive annual loss reflects the assault by e-commerce companies on traditional retailers, many of which are likely to fade in the transformation.

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