After more than a year of high growth following the pandemic, the revenue growth rate of offline sales for sports brands has once again been surpassed by online sales.

This is something the traditional apparel industry might not have anticipated.

Just one year after the pandemic ended, offline stores have become quiet again, and e-commerce has once again become the key to driving revenue growth.

Relying on e-commerce channels to maintain revenue growth was the norm during the three years of the pandemic, but now, with domestic demand recovery weaker than expected and consumers becoming more cautious, this may become a reality that most traditional companies must face.

From the interim reports released by Hong Kong-listed sports brands, it can be seen that in the first half of 2024, the revenue growth rate of e-commerce channels for leading companies in the industry was generally higher than the overall growth rate, with 361° being the exception.

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The overall social situation is also similar: in the first half of 2024, the online retail sales of physical goods in China grew by 8.8% year-on-year, far exceeding the 3.7% growth rate of the total retail sales of consumer goods.

This situation was unexpected for many companies.

After the pandemic ended, throughout 2023 and the first two months of 2024, physical stores showed signs of recovery.

A Li-Ning distributor told us that their offline turnover in 2023 returned to about 70-80% of pre-pandemic levels.

Financial data also shows that Li-Ning's (HK:02331) offline channel turnover growth rate in both the first and second halves of the year exceeded the growth rate of all channels.

Xtep International (HK:01368) even put the words "offline consumption recovery is strong" into the 2023 interim report: "Since the beginning of January 2023... the dominance of online shopping has been shaken due to people's greater desire for physical consumption, and consumers have generally returned to physical stores."

Traditional consumer brands value stores so much because this channel is still the main source of revenue, accounting for more than 60% of the total.

Although the proportion of e-commerce channel sales is gradually increasing and has taken a new step during the three years of the pandemic, in the short term, the channel structure will not undergo a substantial reversal.

However, in the past six months or so, those consumers who "generally returned to physical stores" seem to have changed their minds again and returned to e-commerce channels.

The "return to pre-pandemic levels" that offline stores were looking forward to has not materialized.

While brands vigorously promote the rapid growth of e-commerce, they also cannot cover up the embarrassment of offline lagging behind.

In this situation, all brands have to use all kinds of tactics to try to catch a bit of new growth in the stock market.

The challenge of offline is intensifying.

From a macroeconomic perspective, from January to July 2024, the total retail sales of consumer goods increased by 3.5%, and the sales of clothing, shoes, hats, and textile products increased by 0.5% year-on-year, with a decline of 1.9% in June and 5.2% in July.

Consumers still treat "shopping" with caution.

A recent report by Kearney, "The Top Ten Trends and Challenges in China's Fashion Footwear and Apparel Industry," mentioned that China's per capita expenditure on footwear and apparel is relatively high, accounting for about 4.8% in 2023, higher than the 2.1% in the United States and 1.3% in Japan during the same period, and "will further converge in the future."

For the "top students" in the consumer industry, sportswear, it is not easy to maintain revenue growth in the first half of the year.

Compared with the continuous high growth from 2017 to 2019, and the ups and downs from 2020 to 2022, the revenue growth rate of brands in these two years is relatively stable.

Many apparel brands have lowered their annual revenue and profit expectations set at the beginning of the year.

Li-Ning's financial report conference mentioned many times that "scale growth is not the main goal," Xtep International and FILA are both talking about "maintaining health," and Anta Group (HK:02020) is one of the few leading enterprises that maintain double-digit growth, but it is not confident: "We also have some challenges, it's not easy to achieve..." said the group's co-CEO Lai Shi Xian about the double-digit year-end expectation.

It seems that only 361° (HK:01361), which focuses on the lower-end market, has no "near worries" for the time being.

"Offline difficulty" has become a common pain point for companies.

On weekends on Wangfujing Pedestrian Street in Beijing, some brand store staff also confirmed to us that compared with the same period in 2023, the number of customers this summer has decreased a lot.

Li-Ning's co-CEO Qian Wei mentioned at the financial report conference that "offline turnover faces a very big challenge," and the requirements for the healthy and robust operation of enterprises are getting higher and higher.

The interim report shows that Li-Ning's offline turnover in the first half of 2024 decreased by about 5%, while in the first and second halves of 2023, it increased by more than 10%, but this is also related to the lower base in 2022.

Xtep's main brand did not disclose relevant data on offline turnover, but compared with the e-commerce growth rate of more than 20% (revenue contribution ratio of more than 30%), the brand's total revenue growth of 6.6% is somewhat overshadowed.

At the performance communication meeting, the management of Xtep International mentioned that its same-store sales (the sales volume of the same sales store in the same period of different years) fell by about 1%-3%.

The situation of FILA, a brand under Anta, is relatively special: its 1981 stores are all self-operated, and although there is no middleman to earn the difference, there is no distributor to share the risk when the market is not good.

This has to some extent caused its performance to fluctuate greatly.

From the chart of the above growth rate changes, it can be seen that in 2022, FILA was the only brand among many Hong Kong stock industry competitors with negative growth, and the industry once worried about its operational ability; in 2023, FILA almost led the increase, with a revenue growth rate second only to 361°; in the first half of 2024, the brand's growth rate declined again, falling to single-digit growth.

The industry downstream is also facing challenges.

As large retailers and distributors of sports brands, Topsports (HK:06110) and Bao Sheng International (HK:03813) are both facing revenue pressure.

On the evening of September 10, Topsports issued a profit warning, expecting a net profit decline of about 35% for the six months ending August 31 compared to the previous year.

Previously, Topsports mentioned in the report for the first quarter of the 2024/2025 fiscal year (March- May 2024) that the group's sales amount fell by about 5% year-on-year, and mentioned that the offline passenger flow decreased under the influence of extreme weather in the second quarter (June-August), coupled with weakened consumer confidence, making residents more cautious in spending on durable goods such as textiles and apparel.

Bao Sheng International's performance in the first half of the year also fell by nearly 9%, with a revenue decline of more than 10% in the second quarter.

Faced with the challenges of offline store turnover, almost all companies are improving store transformation and upgrading, optimizing customer experience, strengthening online integration, precise marketing strategies, and so on.

So what tactics or measures have companies adopted in the past year to change the offline downturn?

In general, at this stage, the footwear and apparel market is going through a stage of "opening large stores and improving store efficiency."

In the past, the number of stores was closely related to the company's revenue.

As long as there were enough stores opened, the basic plate of revenue would be large enough.

But now, companies are all living a "careful" life - the quantity is secondary, and the quality is the key.

In recent years, many companies have been closing low-efficiency stores, reducing the proportion of street stores, increasing the layout of shopping centers, and focusing on improving the average area of single stores and store efficiency.

Of course, improving store efficiency is a major project that requires the joint efforts of the supply chain, brand, and sales front and back.

Improving store efficiency can often drive the transformation of the company's overall efficiency.

In the past two years, many footwear and apparel companies' profit growth rate is higher than the revenue growth rate, or the revenue is negative growth but the company is still profitable, which is related to improving efficiency and reducing costs.

As mentioned earlier, 361° is a brand that is "against the trend," with offline sales growth faster than online.

The long-term rooted lower-end market has provided it with a lot of potential energy.

361°'s positioning is almost tailored to the current consumer buzzwords "cost-effectiveness" and "substitute."

According to the brand's interim report, in 2024, 75.7% of the 5,740 stores authorized by the 361° brand are located in third-tier and below cities.

This has also made many brands optimistic about the "lower-end" path.

Chen Zhe Yuan, the general manager of Skechers China, mentioned in an interview with us before that there are still many "blank points" in the lower-end market, and the key is how to target "lower-end."

Chen Zhe Yuan mentioned his strategy, including going to a city to study the layout of top brands.

"Market information is not a secret," he said, Skechers will understand the city's population, GDP, consumption atmosphere, and then assess whether to enter.

In addition, going lower-end also needs partners, such as commercial real estate developers and local dealers.

In the lower-end market, the visibility and influence of a single brand will still be weaker, and it is more necessary to cooperate with partners with a say in the local market to jointly develop.

Therefore, the lower-end market is a choice where opportunities and challenges coexist, and not all brands can adapt.

Uniqlo has clearly defined the lower-end strategy three or four years ago, but the "brand number reading" in January 2024 pointed out that Uniqlo's development speed in third and fourth-tier cities is not as fast as in high-tier cities, and some stores have poor store efficiency.

Moreover, when companies enter the lower-end market, they need to match the products and prices of the lower-end market, and it is not easy to grasp the balance.

Yao Wei Xiong, the president of FILA Greater China, has clearly stated that he will not go lower-end to maintain the brand tone, even at the expense of short-term performance.

Some brands directly start from the store and apply the concept of "concept stores" to the overall store.

The so-called "retail concept store" is a store that mainly conveys brand culture and enhances brand value.

The concept store, with its distinctive design and decoration different from other retail stores, brings consumers into a specific situation and gives a different shopping experience, so it often develops into a web celebrity store, attracting consumers to check in.

Concept stores are very popular among luxury goods, fashion brands, and even car brands.

Around 2017, retail concept stores gradually became the "experimental field" of new retail for brands, with international brands such as Adidas, Puma, and Under Armour opening concept stores in China, and domestic first-line sports brands such as Anta and Li-Ning also trying in this regard.

As brands increasingly emphasize the offline consumer experience, there is no clear distinction between concept stores and brand flagship stores, and directly operated stores.Nike may be the brand that has invested the most and has the greatest influence in this area.

Starting in 2018, Nike launched a series of stores named Live, Rise, Unite, etc., each with different positioning.

Some focus on community stores, some offer unique membership services, and some concentrate on promoting urban culture.

Now, Anta's main brand is also making similar attempts.

At the 2023 Investor Day, Anta's main brand CEO Xu Yang proposed dividing Anta's future retail formats into five levels to match different business circles and demographics.

These are: Arena, Palace, Elite, Standard, and Basic.

The first Arena store has opened in Shenyang's Zhongjie, covering an area of 2,751 square meters and has two floors; the first Palace store is located on Beijing's Wangfujing Street, with a business area of 500 square meters and three floors.

Despite their different positionings, these large stores all combine sales, social interaction, and brand culture promotion.

Anta's main brand has also evolved into multiple sub-brands and has opened dedicated stores, such as Anta Collection and Anta Champion.

The former is a brand sneaker collection store, while the latter focuses on outdoor tracks with the selling point of "same as the Olympic champions."

The dazzling variety of store types is not the main point; the goal is that different stores sell different products.

The mass-market-oriented Anta main brand further refines the supply chain, hoping to break the norm of one region, one batch of goods.

Even online and offline stores have differences; a jacket priced over 2,000 yuan that we see in the "Anta Champion" store is not available in the brand's Tmall flagship store.

As for whether the store transformation is effective, perhaps it can only be proven by the financial report data at the end of the year.