Can Under Armour Win The World?

COLLEGE PARK - Few people in China are familiar with Under Armour or its signature product -- high performance compression shirts worn by American football players. But in NBA-crazy countries like China, Golden State Warriors superstar Stephen Curry is highly recognizable.

In early September, Kevin Plank, CEO of Baltimore-based Under Armour, partnered with the newly-crowned NBA champion on an Asian tour to launch Under Armour’s new Curry Two shoes.

Curry introduced the new gear to local basketball fans and shot hoops with high school students during the five-day roadshow. The tour concluded with the opening of a 15,000-square-foot flagship store in downtown Shanghai, the largest Under Armour store outside the U.S., which Plank said was likely the company’s 75th store in China.

The opening of the Shanghai store is part of Under Armour’s aggressive push to become a global brand. Though the company has dreams of becoming an international force like industry leaders Nike and Adidas, its international success is not a foregone conclusion. Analysts said its narrow product lines and premium pricing would hinder its effort to gain more ground in China, Europe and South America.

A well-known success story in the United States, Under Armour’s market value has multiplied almost ten times since going public in 2005. But with more than 90 percent of business coming from the domestic market in 2014, it is still a very “American” company. By its own admission, the young company has a long way to go to compete with truly global sports machines like Nike and Adidas.

China, where the first Under Armour store opened in 2011, has just started to see profitability. Management is investing heavily in the Asian powerhouse. But the country’s individual taste might force the company to rethink its product assortment.

“Shoes are more important than apparels here. It’s different from America,” said Shaun Rein, a retail expert leading the Shanghai-based China Market Research Group.

In the U.S., footwear sales usually account for 22 percent of total sales at Under Armour stores. The number in Asia is 30 to 35 percent, Under Armour management said at an investor meeting in Baltimore in September. Plank said at the meeting that footwear sales accounted for more than 75 percent of the total on the opening day of the new Shanghai store.

Rein said the price tag, however, is driving customers away. “An average pair of Nike sneakers would cost $70 to $80 dollars in China, which is already very expensive. But Nike has built an image here as a high-end sportswear brand. Under Armour is even more expensive than that. Yet it doesn’t have the brand recognition to back that price point.”

A typical pair of Under Armour running shoes sells for $130 in its China stores. The new “UA Curry Two” basketball trainers sell for as high as $209.

Basketball is very popular with Chinese consumers; The NBA might be the most successful American sports league in the country. More than 60 million Chinese people follow the NBA’s official social media accounts.

Curry’s final appearance in Shanghai attracted over 1 million live stream viewers and 3 billion impressions on both traditional and social media, according to Under Armour. Plank is betting the NBA’s international recognition will bring new customers to the company's stores.

Under Armour faces competition not only from Nike and Adidas, but also from rising local companies like Anta and LiNing. The local companies have nearly as much market share as the global giants -- and sell shoes at a fraction of the cost.

Another potential problem for Under Armour: lately, Rein said Chinese consumers are spending less money on clothing and more on dining and entertainment.

In Europe, it faces similar problems. In Western Europe, footwear accounts for about one-third of the total sportswear industry, according to research firm Euromonitor International. “More than half of Nike and Adidas’ revenue comes from footwear. For Under Armour, it’s the opposite. Most of its business is clothing, which is a disadvantage to the brand,” said Jorge Martin, a project manager at Euromonitor’s London office.

In Europe, many consumers buy casual clothing that is inspired by sportswear, so-called “athleisure” apparel, Martin said.

“This is a key point of competition and it is driving the whole sportswear market. The reason why Nike and Adidas have been doing so well is that they’ve been developing a lot of sports-inspired lines, targeting mainly at female consumers.”

Under Armour not only faces pressure from its traditional competitors in that area, but also from trend-sensitive fast fashion brands like H&M and Uniqlo, which offer sports-inspired lines at a much lower price.

“The brand still has a strong alignment with American football and a somewhat macho and aggressive design aesthetics. Not a big seller outside North America,” Martin said.

In Latin America, Under Armour’s marked its first foray onto the continent by becoming the official uniform supplier of Chilean soccer giant Colo-Colo in early 2014.

The company had been selling products through third-party distributors and just recently opened its own subsidiaries. In three target countries - Mexico, Brazil and Chile - retail stores and administrative operations were built in the past 12 to 18 months. Management said it is still in the investment phase and that it would take another three or four years to get to profitability.

The company, which started out as a niche maker of high-performance athletic wear, has never been known for aggressive product line expansion. It offered only one product -- compression shirts -- from 1996 to 2000. “It wasn’t until 2006 when we finally [made] shoes. And frankly it’s not really until now, eight years after selling them, do we begin to see scale and get better in footwear,” Kevin Plank said at the Goldman Sachs Builders and Innovators Summit in 2014.

In its most recent quarter, Under Armour already saw a drop in gross margin to 46.2 percent from 48.8 percent a year ago, meaning less profit after cost is factored in. At the investor meeting in Baltimore in September, COO and CFO Brad Dickerson said international business brings a lower gross margin than domestic business, primarily because of recent unfavorable currency exchange rates and a higher share of footwear in international sales.

“The footwear business in general is inherently lower margin than our apparel business,” Dickerson said.

“Clearly, a consumer base the size of China will give the company opportunities somewhere, but market development with the brand in its current position may be a struggle,” Martin said.