Wells Fargo analyst sees deepening troubles for Western brands in China

A Wells Fargo analyst has warned of worsening challenges for Western brands operating in China, citing weak demand, increased competition, and heavy promotional activities. The CEO of a major Chinese distributor and retailer, James Wong, presented this view during a call with analysts. He attributed the issues to local competitors offering better value with shorter lead times, as well as high fixed costs and declining sales.

The analyst expects continued difficulties for Nike and Lululemon, with Deckers also facing risks. Heavy discounts are anticipated to begin in October, leading up to major shopping events in November and December. Inventory levels remain high for brands that have yet to meet sales targets. Wong sees no improvement in macroeconomic conditions, noting depressed consumer sentiment due to job scarcity, high unemployment, and reduced savings.

Weather disruptions have also impacted the third quarter, leading to another short winter season. Nike sales in China are projected to decline by 20% in the third quarter, up from a 10% drop in the second quarter, with the fourth quarter expected to worsen further. Wong's HOKA business is showing slight growth, while KAILAS, a competitor in Deckers' portfolio, has gained over 50% market share in the trail running segment.

Lululemon's struggles are attributed to a lack of innovation and fierce competition in the athleisure market, rather than the July incident at the Great Wall. The brand is increasingly reliant on promotions and is facing saturation in tier-one cities, with limited traffic in tier-two cities. Other brands such as Adidas, Salomon, and Arc’teryx are experiencing growth in China, with Adidas leading the pack in terms of growth.