It’s amazing how this highly upvoted answer (Ron Rule’s answer to What stops Walmart from beating Amazon in online shopping?) is basically proving, without the author realizing it, why Disruption Theory works. The answer takes an exceedingly narrow view of the entire retail industry and labels the pursuit of leadership in an emerging market/channel (ecommerce), which is clearly where the world is heading over the next few decades, as mere “bragging rights”.

“Disruptive innovations tend to be produced by outsiders and entrepreneurs, rather than existing market-leading companies. The business environment of market leaders does not allow them to pursue disruptive innovations when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition).”

(Source: Disruptive innovation – Wikipedia)

The real answer is, Amazon has already won in online shopping. It is not due to a lack of effort from competitors, which is probably too little too late.

ecommerceIQ

This quote, attributed to Jeff Bezos, sums up why:

Your margin is my opportunity.

Even with Walmart’s massive revenues and profits (compared to Amazon), it cannot compete with the juggernaut that is built by Bezos. Amazon is “not profitable” by choice. All the earnings are put back into the business, either into more capital investments or to sell loss-leading products that lock in customers or drive competitors out of business, vertical by vertical, and market by market.

The investments that Amazon has made over the first two and a half decades of its existence give it momentum such that it is tough if not impossible for any other company to catch up over the coming decades: the technology stack, the deeply integrated logistics/supply chain (they are now getting into competition with FedEx/UPS), the effective third-party seller marketplace, the customer loyalty (through Prime).

Every exponential curve runs below the linear curve in it’s infancy, that is until it suddenly crosses over, goes through the roof and hits the sky. Even though in absolute numbers Walmart is still bigger than Amazon, only one of the lines below is going up and to the right:

ecommerceIQ

On top of all this, in the last couple of years, Amazon is also getting into physical retail, with acquisition of Whole Foods and pilot of Amazon Go. Here’s a great analysis of this: Amazon’s New Customer (I highly recommend Stratechery for tech+strategy topics in general).

At this point it is more likely that Amazon will eventually beat Walmart at physical retail, than Walmart will beat Amazon at online shopping. If Walmart wants to survive till the end of this century and not go the way of Sears, Walmart must come up with a strategy that creates value in a digital, super-connected future where everyone is hooked on to the convenience and choice furnished by online shopping, but in a manner that converts their massive current investments in physical retail from liabilities to assets.

The last thing Walmart should do is to build an Amazon clone. As then, they are playing by Amazon’s rules. And nobody beats Amazon at their own game.

 

Read the original on Quora by Pararth Shah, Software Engineer at Google

In a not-so-shocking move last month, retail giant Target acquired a grocery delivery startup for more than half a billion dollars to better compete with Amazon in the US.

Given the latter’s influence on the state of retail over the last decade, there has been a wave of excitement and fear sweeping the industry on a global scale.

The gradual consumer preference for digital has forced traditional businesses, predominantly in developed markets, to restructure internally or shut down. Case examples include retail leaders Macy’s, Sears, and American Apparel, whose legacies are now read about in bankruptcy stories.

Today’s headlines are revealing retail behemoths getting pushed to a corner by a new breed of entrants shaking up the retail status quo with business models revolving around ecommerce, omni-channel, click and collect. These new companies also tend to execute faster, reach further and understand how to utilize the goldmine that is the internet.

But understanding that “digital disruption” or “retail innovation” is needed within a traditional corporation isn’t merely enough to bring about real change.

The speed at which businesses incorporate digital channels will determine their chances at survival and relevancy to the next generation of consumers.

But by the time they come around to asking, “am I moving fast enough to catch up to my competitors?”

It’s already too late.

Shopping sprees in the West

Companies in the US felt heat from the Amazon Effect much earlier than India or Southeast Asia did, ensuing panic in direct competitors like Walmart, Target and Home Depot and forcing them to act quickly.

In the last two years alone, large corporations like the above invested over $5 billion in acquiring digital companies to beef up their portfolios.

While most of these companies have the capacity to carve out resources to build their own ecommerce operations in house, the pace at which the internet industry moves doesn’t wait for employees to learn “Digital 101”.

Not to mention the additional pain points such as internal resistance, lack of ecommerce talent and channel conflicts. Large corporations in general tend to struggle when venturing outside of their core competencies. The quickest way to patch up your business is to buy what you don’t have.

In regards to Walmart’s total $4 billion acquisition spree,

“Walmart is buying a new consumer base — upper-middle-class people who normally wouldn’t shop at Walmart — and these new relationships would bring higher margins.” — Jim Cusson, president of retail branding agency Theory House

And the “buy what you don’t have” trend is prevalent across the industry as more traditional players gobble up digital startups. In the last eight months alone,

Walmart [retailer]: acquires Bonobos for $310 million in cash and last mile delivery startup Parcel
Sodexo [food management]: acquires majority stake in Paris-based online restaurant and food delivery startup FoodCheri
Home Depot [retailer]: acquires online business of retailer of textiles and home decor products The Company Store
FTD [flower delivery giant]: acquires on-demand flower startup BloomThat
Target [retailer]: acquires same-day delivery startup Shipt
Luxico [luxury home rentals]: acquires US-based text messaging platform for hotels Hello Scout
Albertsons [grocery retailer]: acquires meal kit company Plated
McKesson Canada [healthcare supply chain]: acquires marketplace for natural healthcare and beauty products Well.ca

“Quality exits like this don’t stem from a ‘for sale’ sign tacked to the door.” – Chris Arsenault, board member at Well.ca

Of course, the enormous price tags of these acquisitions could be spent on buffing up the in-store experience but the returns would take a long time to see whereas Target’s own online sales growth from Q1 2015 to Q3 2017 show how successful the company has been able to leverage ecommerce.

Target ecommerce growth from 2015 to 2017. Source: Bloomberg

While an acquisition may seem like a quick, easy solution, there are numerous factors to consider to avoid backlash such as price point adjustments and consistent branding. Without understanding how digital can compliment the current business model, it’s likely the new asset will simmer and die in a couple of years. Simply put, don’t buy ecommerce for ecommerce sake.

Absorbing a digital company on the other hand brings about mountains of data, new customers, a solid brand, fresh talent and a seat at the hippest place where everyone hangs out, the internet.

Movement in the ASEAN region

As with most trends, they eventually infiltrate markets on a global scale and Southeast Asia is no exception. Even a couple of years before Amazon’s lackluster entry in Singapore, a few traditional retailers took the acquisition route to capture digital opportunity early.

Sephora bought online beauty retailer Luxola in 2015, Central Group acquired fashion e-tailer Zalora Thailand in 2016 and last year announced a joint venture with Chinese internet giant JD.com.

What has driven this flurry of activity by corporations across the world?

It is avoiding what Jeff Bezos describes as “Day 2”. An idea explained nicely by Bezos in his letter to stakeholders:

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.” – Jeff Bezos

Which day does your company operate in?

The Background

Danish jeweler Pandora rose to fame to become a household name after launching its signature charm bracelet in 2000, almost two decades after married couple Per and Winnie Enevoldsen began their modest jewelry business in Copenhagen with imported goods from Thailand back in 1982.

Their success in the Danish market pushed them to think outwards, leading to the company’s international expansion into the US market in 2003, followed by Germany and Australia in the following year.

Fast forward 14 years later, Pandora’s Thai-made fine jewellery is sold in 100 countries through over 900 concept stores, not to mention the 10,000 other retail distributors around the world.

Funny how one little charm bracelet propelled the brand into the global limelight and accounts for 77% of the company’s global sales.

How did this all happen?

One has to take a look at the evolution of the fine jewelry industry to understand Pandora’s success.

The bracelet popularized the brand because of its upscale look and relatively affordable pricing in a market dominated by Tiffany and Co and Cartier. The price of a Pandora bracelet starts at $35 and with more than 800 charms to choose from, the consumer can collect and customize their own bracelet that often signify a milestone in life.

The charms bracelet is the top selling product for Pandora. Image: Fortune

“They tapped into the consumer’s desire for jewelry pieces that are highly specialized.” – Erica Russo, fashion director of accessories and beauty at US department store Bloomingdale’s.

“There’s something for everyone, so there’s a wide appeal for shoppers,” continued Russo.

With a lucky charm under its belt, Pandora issued an IPO in October 2010 to raise $2.1 billion and now the company is the third biggest jeweler in the world behind Cartier and Tiffany and Co, but with a third of its market value wiped out earlier this year, can it maintain this position?

The Challenge

The growth of the global jewelry and personalised accessories market in general has been stumped over the years thanks to macroeconomic factors such as inflation and unemployment plaguing the industry. But global geopolitical and economic uncertainty are not the only things slowing down growth.

Legacy jewelry brands are also slow to identify the shift in their audience’s behavior.

Long gone are the days where women only acquired new pieces of jewelry as gifts from husbands or significant others.

Today, with the increase in women’s purchasing power, ladies are buying their own jewelry — a fact still largely ignored by traditional jewelry brands.

A survey by Jewellery Consumer Opinion Council found that as a jewelry consumer, the [female] demographic is largely underexploited and ignored by the broad spectrum of the jewelry industry.

Unlike previous generations, millennials and Gen Z don’t find the charm of brands like Tiffany & Co as attractive or as Neil Saunders, CEO of retail research firm Conlumino says,

“Millenials are increasingly unmoved by brand names and seeking more bang for their buck, Tiffany’s “old-world luxury” charm isn’t working.”

“Although the brand is not seen as negative, it is seen as being somewhat tired and traditional,” noted Neil. “ Young consumers especially see it as a brand for the older and a different era.”

Not to mention that the younger generation has more options and exposure to smaller brands through online shopping. With its shares suffering and only one successful product, Pandora needs to adapt to the market situation to survive now more than ever.

Pandora shares drastically drop in 2017 after years of high growth

The Strategy

In an effort to move beyond its charm bracelets, the company is actively pushing its line of rings and necklaces, marked by the company’s 2015 Mother’s Day campaign “The Art of You” that featured three female generations passing down jewelry pieces – no men.

“Pandora has deep ties to charm bracelets that memorialize times and people. What’s new here is we’re taking that heritage and bringing it into the future, where it’s also about self expression,” explained Caitlin Ewing, Executive Creative Director for marketing agency Grey that collaborated with Pandora for the campaign.

The campaign hit its target, sale shares of the company’s rings rose to 13% from 4% in 2014.

Pandora’s ‘The Art of You’ campaign popularized its ring selections. Source: Canadian Jeweller.

Furthering its priority to target millennial women, Pandora also launched a global campaign called “Do”, proving no matter where you are in the world, there are values that all women share.

“Today’s consumers expect you to have a point of view and a voice an enable them as opposed to being a director of them. The Pandora voice is all about inspiring women to be true to who they are,” said Charisse Ford, Chief Marketing Officer for Pandora Americas.

However, the company is not without misses. A recent holiday campaign by the brand in Italy received backlash for its marketing message that was deemed sexist and forced the company to release an apology and pull its ads from subway stations.

Translation from Italian: “An iron, a pyjama, an apron, a Pandora bracelet. In your opinion, what would make her happy?” Source: Lefanfarlo Facebook Page.

Pandora also distances itself from the image of a traditional jewelry brand with rich heritage as seen by the lack of narrative or celebrity endorsement to gain a wider audience.

Another standout factor from Pandora is the way it operates its business.

“One of the reasons why Pandora has been so successful is we don’t behave like a jewelry company, but more like a fashion brand,” said Isabella Mann, Pandora VP Marketing for APAC.

Similarly to how fast-fashion companies function, Pandora releases new product lines seven times a year, only two months apart, much more often than traditional jewelers that do it quarterly.

It seems to be meshing well with a generation with shortening attention spans as Pandora was the only “new luxury brand” chosen as a favorite by affluent millennials in a survey by MVI Marketing.

One of the biggest contributing factors to Pandora’s rapid growth is how the company took full control of the supply chain process.

By setting up production in Thailand, the company was able to decrease its operational costs and maintain the quality of its products. The company plans to produce 200 million pieces per year by 2019 Q4 and promote the Thai jewellery industry at a global level.

Pandora also controls distribution in India and Africa by buying back local franchises that sell its jewelry, both in the branded concept stores and shop-in-shops.

In growing markets like Asia, that contribute to 19% of the company’s overall business and registering the fastest growth rate for jewelry, Pandora wants to maintain the brand rather than build stores.

The opening of Pandora store in Hong Kong. Source: HK Citylife.

“It’s no longer about building the brand, but about maintaining the brand. You’re not going to see loads of Pandora stores opening anymore,” said Mann.

Without new store openings, the company has more resources to focus on its online strategy.

Its ecommerce store opened in the US in 2015 after testing the European market a few years earlier. The company’s online store is now available in three continents including Asia Pacific but in Southeast Asia, Singapore is the only market where shoppers can order online through its website.

Pandora’s online store is available for customers in Europe, America, and Asia Pacific.

The Future

Pandora’s journey as a relatively new jeweler has been filled with instances of trial and error as it emerges from legacy luxury brands such as Tiffany and Co as a front-runner in the lagging luxury jewelry retail scene.

By cutting costs through effective manufacturing practices, leveraging ecommerce to shift away from brick and mortar, and even creating PR buzz through controversial advertisements shows the brand’s agility on responding to adversity and obstacles.

The company seems well on its way to achieve its aspiration to become the world’s most loved jewelry brand.

If diamonds aren’t forever, Pandora jewelry is.

Recently in the news, Starbucks opened a new Roastery outlet on Nanjing Road in Shanghai last week begging the question, so what?

There’s nothing surprising about a new Starbucks in China, except this is now the world’s largest one at 30,000 sqm, twice the size of its counterparts in the US and will be the first-ever to incorporate in-store augmented reality (AR), thanks to China’s most influential internet company – Alibaba.

What can consumers do in this store powered by Alibaba’s technology and Mobile Taobao app?

  • Access a detailed map of the floors and menu with Alibaba’s location-based technology
  • Save favorite Starbucks products to their Mobile Taobao account
  • Scan key features around the Roastery to get information on coffee bars, brewing methods via animations
  • Earn a customized photo filter for sharing on social media
  • Ultimately, appeal to the digitally savvy Chinese audience

Sure, China is an attractive market to invest in but what is Starbucks planning with its“most ambitious project ever”?

An augmented reality app is used in the new Starbucks Roastery in Shanghai, China. Photographed on Friday, December 1, 2017. (Joshua Trujillo, Starbucks)

Slow Growth Around the World

Starbucks second quarterly earnings reported $5.29 billion, short $120 million of the expected $5.41 billion. While the coffee giant has found great success in its 46 years because of its consistent and convenient services and products, the company has felt the squeeze of rising competition from convenience stores and fast-food chains like McDonalds aggressively improving the quality and pricing of its beverages and menu.

And so, to capitalize on a blue ocean, the company decided to focus on a region where coffee culture is only emerging

Revenue from Asia Pacific makes up almost 15% of Starbucks’ annual revenue, a 5.5% increase from five years ago.

It’s obvious to us that the holding power of China for Starbucks is going to be much more significant than the holding power of the US,” — Starbucks’ founder and Chairman Howard Schultz.

As the Chinese economy grows, Starbucks’ success does as well in a country where disposable incomes increase and the younger generation is attracted to quality-driven and unique brands that speak to who they are.

“For coffee, there’s a certain kind of ‘in-the-know’ from consumers who seek out these good boutique shops,” said Jack Chuang, partner at OC&C Strategy Consultants who studied the Chinese coffee market.

Although still predominantly a tea-drinking nation, China is rapidly developing a taste for coffee, an activity previously thought was for the affluent or Westerners.

Jack Ma’s New Retail Vision Reinforced Through Coffee

What does Alibaba get out of it?

It was as recent as Single’s Day when Jack Ma announced the ‘New Retail’ concept that aims to blur the line between conventional brick-and-mortar retail and ecommerce with the help of technology and data.

In the coming years, we anticipate the birth of a re-imagined retail industry driven by the integration of online, offline, logistics and data across a single value chain,” — Jack Ma.

Alibaba’s HEMA Supermarkets already blur the line where consumers can shop for groceries online via the HEMA app and receive them within half an hour, or scan barcodes at the store, pay via the app, and set up delivery.

A shopper can easily scan barcodes in the store and pay for the products through the HEMA app before having them shipped home. Source: Alizila

Partnering with a highly influential brand like Starbucks and providing them with the right technology is Ma’s push for even faster digital adoption..

A survey has shown that 40% of consumers are willing to pay more for a product if they could experience it through AR, and 71% claim that they would shop at a retailer more often if they offered AR.

Seems like Starbucks and Alibaba will be brewing some heavy money in China.

THE BACKGROUND

Every year towards the holiday season, millions of women (and men) around the world tune in to their televisions and laptops to watch “Angels” strut down a runway in elaborate and expensive lingerie side by side celebrities.

Victoria's Secret China

Victoria’s Secret Fashion Show 2017 in Shanghai. Photo Credit: W Magazine

Yes, it’s the annual and extremely famous Victoria’s Secret Fashion Show.

Started in 1995 as a way to market Victoria’s Secret as a highly coveted label, the show has become a spectacle that boasts: “the world’s best bras, the sexiest panties & lingerie, and the most beautiful Supermodels.

The brand has come a long way since its first store opening by Roy Raymond in 1977 in Palo Alto, adapting a boudoir style with dark wood, oriental rugs, and silk drapery – a foreign style concept in the age of bell-bottoms, maxi-dresses and bold monochrome colors.

And while in five years time, the company earned annual sales of more than $4 million in the US, something wasn’t working. Growth was stalling and bankruptcy was on the horizon.

Victoria's Secret China

The current store of Victoria’s Secret is designed to make women feel at home. Photo credit: Olarch

It was only until Leslie Wexner, founder of The Limited (now L Brands), stumbled upon the VS store and quickly saw what was wrong.

Victoria’s Secret didn’t appeal to women.

In Raymond’s quest to build a lingerie store where men felt comfortable, he had alienated his market demographic and so in 1982, Raymond sold Victoria’s Secret to Wexner for $1 million.

Under new leadership, Wexner immediately introduced floral patterns and colors to soften the once racy VS image to a more subtle and affordable look. It was envisioned as the “La Perla for the mass market”.

In the early 90s, Victoria’s Secret had become the largest American lingerie retailer with sales topping $1 billion a year.

“What I have thought about, and continue to think about, is that we are specialty merchants and our primary skill is knowing about women,” Wexner said.

The company had succeeded in popularizing and, more importantly, normalizing the idea of sensual lingerie as part of everyday wear, whereas before it was reserved for only special occasions such as honeymoons.

In 2013, the company recorded annual sales of $6.6 billion and was valued at $1.9 billion.

THE CHALLENGES

Now in the present day and 40 years after its birth, Victoria’s Secret is running into trouble with coming-of-age females that are choosing comfort over flash.  

Analyst from Guggenheim Securities shared that despite the brand’s continued domination in the US lingerie market, the biggest challenge for the business is its ability to continue generating fashion that resonates with new shoppers.

In the past, VS tried to grab more market share by expanding into categories like swimwear, athleisure, and apparel and although the categories generating some profits — they were not growing.

The brand was also getting backlash for not being inclusive to other body types in an age when championing plus-size models is applauded in the traditional fashion industry.

As Cora Harrington from Lingerie Addict said;

The sexy image it [Victoria’s Secret] cultivated for so long has grown stale because of the brand’s unwillingness to broaden how it defines beauty.

Victoria's Secret China

#ImNoAngel campaign to promote body inclusivity take dig at Victoria’s Secret

Victoria’s Secret has also been slow in international expansion and missing out on the opportunity to capitalize on the brand’s recognition on a global scale.

Stores outside of the US are operated by franchise partners and offer only an assortment of perfumes and lotions – very few offer Victoria’s Secret famous lingerie.

In its financial report released by L Brands earlier this year, Victoria’s Secret same-store sales have fallen 20% compared to a year ago. The number of stores is also down from 1,177 to 1,174 (including six openings and nine closures).

The report caused shares of parent company L Brands to plunge 16%, making it the worst performer in the S&P 500 Index. And in the last 12 months alone, shares have gone down by more than 40%.

“I wasn’t happy with the performance the last several years of Victoria’s Secret. I thought the brand had stalled out — in beauty, in lingerie and in the [online and catalog] channel. We had to make changes,” admitted Wexner.

With so much work to be done, could the Angels fly higher?

THE STRATEGY

In 2016, Victoria’s Secret shut down its swimsuit business and scaled down unrelated apparel items to cut costs and focus on its core products, lingerie and body fragrances. It also revamped its product line by launching a bralette collection last year to appeal to the younger generation.

“Why were we selling Uggs? Anybody can sell Uggs. No disrespect to Uggs. Nice product. But why are we selling Uggs? Does that really tie to the Victoria’s Secret brand?” said Stuart Burgdoerfer, CFO at L Brands.

Victoria's Secret China

The company also stopped producing the famous printed catalogue — saving them $150 million per year.

“We don’t think a catalog is a particularly compelling idea in the world of cellphones,” said Burgdoerfer.

No more catalogs meant Victoria’s Secret direct consumer channel is solely reliant on its ecommerce website that ships worldwide. In the recent years, online channel has become the driver of growth for the brand — 24% increase in sales in its October sales report.

Last year, the online channel contributed to over 21% of the company’s revenue.

Victoria's Secret China

Victoria’s Secret website is the answer for the brand’s international fans

The brand has also picked up the pace of its international expansion.

“We’ve been a patient second or slow third because we thought we would learn more,” said the founder, chairman, and CEO of L Brands, Leslie Wexner.  “We always asked ourselves: are you really building a sustainable international business?”

Like many other Western companies, Victoria’s Secret named China as the top destination for expansion, calling the country its most important market and predicted to bring in $1 billion in annual sales by 2021.

How is the company attempting to capture China?

For starters, the company has moved away from a franchise model in China in favor of company-owned stores by acquiring the stores from its franchise partner.

“It seems to me that we’re going to be doing most of the heavy-lifting anyway. It makes sense we should be in it completely,” says International President of L Brands Martin Waters.

Earlier this year, the company opened two flagship stores in Shanghai and Chengdu. The stores carry the full VS assortment including lingerie, Victoria’s Secret Sport, and Victoria’s Secret Pink.

The brand’s biggest show of commitment has been recording its annual fashion show to China — making Shanghai the first Asian city to host the famous Victoria’s Secret Fashion Show typically held in the US.

And while China has become Victoria’s Secret’s most recent muse, it hasn’t overlooked emerging markets and opened a full flagship store in Singapore November 2016.

Victoria's Secret China

Inside the Victoria’s Secret flagship store in Singapore. Photo: Victoria’s Secret

“Singapore is seen as an ideal test bed for brands looking to break into Southeast Asian markets, and is viewed as an important place to build brand awareness,” said Sarah Lim, Singapore Polytechnic’s senior retail lecturer. “They don’t just sell products, but strengthen their brand with fashion shows and experiential shopping.”

THE FUTURE

Despite the lackluster sales performance in 2017, there are early signs that the worst may be over for Victoria’s Secret.

L Brands stock has already seen a jump in the recent weeks as analysts report on the company’s turnaround efforts and despite competitors clamoring to grab the top spot, Victoria’s Secret still has commanding market share in the US.

If the company continues to play its cards right, Victoria’s Secret may have regained its wings to fly high again.

THE BACKGROUND

US-homegrown sportswear brand Under Armour was founded in 1996 by the former captain of University of Maryland’s football team, Kevin Plank, in his grandmother’s basement. Having first-hand experience with clothing unsuitable for sweaty sports led him on a path to find a better fabric.

The first T-shirt from the brand was made from moisture-wicking fabric, which contained fibers that drew sweat off the skin for faster evaporation. It was the perfect material to keep athletes cool and dry.

In the first year, the company generated $17,000 in revenues by selling it to college football teams.

Under Armour sales

Two years later, Under Armour signed its first league-level deal to become the official supplier for NFL Europe in 1998. Fast forward to 2005, after the company struck deals with media powerhouses like Warner Bros, ESPN, NBC, and organizations like NHL, MBL, and USA Basketball — it eventually went IPO and raised $157 million .

In 2010, the company’s annual sales topped $1 billion for the first time.

Confident with double digit growth in the last few years, Under Armour eyes an aggressive $10 billion valuation in 2020, up from the $4 billion valuation in 2016 but with recent headlines reporting the company’s decline in quarterly sales for the first time, is the goal feasible?

THE CHALLENGE

Under Armour underwent scrutiny after posting its Q3 2017 earnings report, revealing the company’s first quarterly sales decline (-5%) since going public in 2005. The news drove the company’s stocks down by more than 20%.

Under Armour sales

Under Armour’s growth has been going down after hitting its first $1 billion revenue in 2010. Source: Quartz

Citing the weakening sportswear market in North America, Under Armour is joined by Nike in the disappointing growth of this quarter. But is it really lacking consumer demand when competitor Adidas successfully grew its business in North America by 32% in the first half of 2017?

Under Armour CEO Kevin Plank admitted that the company celebrated fast growth too early.

“I think we probably were a little braggish,” said Plank.

“This is now about more than external factors; it demonstrates issues with the brand and its proposition,” wrote Neil Sanders, Managing Director of research firm GlobalData Retail.

Another analyst from the firm also mentioned that Under Armour “does not have the clarity or a sense purpose in the way that Lululemon or even Nike does.”

In the US, the company is mostly a wholesale brand and heavily dependent on its wholesale partners, which made up 65% of its 2016 revenue. Meanwhile, its direct-to-consumer (DTC) segment — a mix of the company’s offline and online footprint — only contribute 31% of the revenue.

So when the partners are getting disrupted by online and their retail stores are closing down , the company’s performance is also highly impacted — or to quote Quartz :

“It’s selling products that customers aren’t buying, at stores where they’re not shopping — and when they’re shopping, they don’t want to pay full price.”

THE STRATEGY

“Under Armour is not so broken that it cannot be fixed. But the days of glory, when it would post double-digits uplifts in sales, are over. Now is the time to work out, slim down, and become more competitive,” said Sanders.

To face the ‘ difficult environment ’ that the company will likely face into the next year, Under Armour needs to reduce its cost structure and restructure the business in a way that suits the pace of the company’s not so rapid growth anymore.

Plank declared 2017 to be a reset year for the company and announced it was going to cut 2% of its global workforce (roughly 280 job cuts), mostly at its HQ.

“After 6.5 years of more than 20% top-line growth that ended in the fourth quarter of last year, we are clearly operating in a different environment, particularly in our largest market (of) North America,” said Plank.

Not all is bleak for Under Armour. Although North America slumping its sales in the international market is exceeding expectations with 35% quarterly revenue growth to $350 million.

The company also plans to put more focus on its direct to consumer segment, especially ecommerce.

Under Armour’s direct-to-consumer sales, including ecommerce, grew 15% year-on-year while overall sales decreased 4%. – DigitalCommerce360

“We’re protecting and prioritizing international expansion, ecommerce development, footwear design development, areas like that while we continue to dig in deep and kind of right-size the cost structure,” said CFO David Bergman.

In Asia , the company saw 89% of sales growth in Q2 to $93.6 million, driven by customers from China, Taiwan, and Korea. The company’s interest in Southeast Asia has also increased . The company, through retailer Triple , plans to open 35 stores in total across the region including Vietnam, Brunei, Indonesia and Thailand.

“Establishing the retail network in rapidly growing markets such as Southeast Asia is regarded as the key element to leverage this brand marketing strategy,” said Toshi Sakurai, GM of consumer service Mitsui APAC (invested in Triple, the sole operator of Under Armour Asia).

Under Armour sales

Under Armour online stores in Southeast Asia are operated out of Singapore.

THE FUTURE

“As we look to close out 2017, we do not expect these conditions to improve. And although it’s too early for us to provide an outlook for fiscal 2018, our initial assumptions anticipate continued strength across our international and direct-to-consumer businesses,” said CEO Kevin Plank.

Double-digit growth again on its home turf might not be in the cards for the company anytime soon, but with a $231 billion global appetite for sportswear growing steadily, Under Armour only needs to play to its strength in the international arena.