With the rising global GDP per capita, more people are entering the middle class. The days of insufficient food and clothing have passed. Most office workers do not have to do the physical work such as farming or construction. (Though computer science engineers are still farming in the coding world.) There is a law in physics called the law of conservation of energy. How can we prevent the body’s excess energy from being converted into three highs – high blood sugar, high blood fat, and high cholesterol? The only way out is exercise.
Unless live in a vacuum, you might have noticed, fitness and yoga have become an indispensable part of the middle-class lifestyle. Most companies’ employee benefits, besides medical insurance and 401k, also include a subsidy for the gym. Nearly all the white-collar workers join gyms or yoga studios. Besides people like perks, this trend is very likely to continue or even get more significant for three reasons.
First, people feel happy when they produce chemical substance called endorphin, which is like morphine. Endorphin is released when people exercise. Exercise is an activity that allows people to have a sense of pleasure without eating, drinking, or gambling. It can also improve one’s appearance and prolong life, so how can it not be popular?
Let us think about why so many people love sports, and why sports stars are sought after by the public as gods. Because there is a need for faith in human nature. Because the fairness in a sports competition is exceedingly rare in the unfair real life. When a sports brand is associated with the idol, people would probably break their bank to support it.
In American sportswear, one thing that changed the market structure took place in 2016. That is the bankruptcy of the large sportswear retailer Sports Authority and the closure of 450 stores. The ensuing inventory liquidation has severely hit the price of the entire sportswear industry. As the industry leader, Nike unexpectedly announced that it would lower its minimum advertised price. This allows retailers to sell Nike shoes and clothes at a discount of 25%. This sudden price war caught many small brands that survived by the price difference with Nike by surprise, including Under Armour endorsed by Stephen Curry. Behind this incident is the falling of the entire brick and mortar stores and the advent of the era of e-commerce direct sales.
Many sportswear industry rookies have not been sold through distributors since day one. They are soberly aware of the importance of brands in competition. For example, Lululemon allocates most resources to create a brand that represents the yoga lifestyle.
Like the high-end kitchenware store William Sonoma launched free cooking classes, Lululemon launched free yoga classes to encourage customers who like yoga to frequent the stores. In the past ten years, Lululemon has also sponsored over 2,000 yoga teachers, calling them ambassadors. Yoga is not a temporary fanaticism but has gradually become a secular lifestyle. It is estimated that the US market for yoga and pilates will reach $12 billion in 2019. And Lululemon’s sales have increased almost 25 times in nine years. Its store sales reached $1,560 per square foot, only behind Tiffany and Apple stores. This is inseparable from the close connection between Lululemon and yoga.
The power of idols is particularly important. Nike has never been stingy in sponsoring popular athletes and teams. Its sponsorship roster includes football star Neymar, basketball stars James, Durant, Irving, tennis star Serena Williams, football star Ryan, gymnastics star Byers, and NBA rookie Williamson who signed in after defeating many competitors, etc. Of course, there is Jordan, the founding father of Nike’s empire. Conversely, Nike’s strong brand and resources have also attracted the best players to sign with it. For example, in 2013, James rejected the higher sponsorship of Rebook and chose Nike, with an annual sponsorship fee of $30 million until his 64 birthday.
Athletes sponsored by Nike, such as James and Durant, have tens of millions of followers on social media. Jordan retired from his basketball career in 2003. Many millennial children have not seen Jordan play with their own eyes, but Jordan shoes still generated $3.6 billion in sales in 2020, second only to Nike and Adidas shoes. It can be seen how powerful and lasting the appeal of idols is.
Nike has also invested heavily in many of its apps, such as Nike Plus for Nike members, Snkrs app for shoe fans, run club and training club for running and fitness. Among them, Nike Plus has 100 million members, and Snkrs has several million members. Many limited-edition Nike products can only be purchased by members of Nike PLUS, such as Ronaldo’s Assassin football boots. Nike has been building an ecosystem of its own. There are idols, fans, competitions, music, fitness courses, and high-end products. As stated in “A Brief History of Mankind”, Homo sapiens can annihilate other species of humans, not because they are physically stronger, but because they know to spread the abstract ideology. Ideology can bring together many, many like-minded people. Nike did exactly this.
Since what everyone ultimately buys are the products, the quality of the products is crucial to the company’s sales. For example, the Curry shoes, launched by Under Armour, have been criticized for their poor quality and style, which has dragged down sales.
Nike and Lululemon attach great importance to product quality and innovation because they know that in this high-tech era, customers will pursue products with high-tech content. Since the introduction of compressed air running shoes in the 1980s, Nike has recently added Epic React with foam cushions and Nike air’s new VaperMax. Nike launched shoes with ZoomX technology to compete with Adidas’ popular Boost running shoes. He claims that the material of ZoomX is used in the space industry and can return 85% of the energy to the runner. Although these claims are difficult to prove, Nike has always dominated the market for running shoes, generating about $4 billion sales each year.
Lululemon has been developing new fabrics. It has a 50-person research and development department, including textile workers, scientists, and engineers. Lululemon’s fabric includes many microfibers, much higher than the nylon microfiber content of traditional polyester. This fabric keeps its garments free of bacteria and odor and will not be washed out, and thus Lululemon’s products are highly rated among customers.
As a sophisticated investor, adding the high-quality sportswear names to their future investment plan are becoming worthwhile for the reasons discussed above. Regardless, as more people across the world move into middle class, they will realize how important a gym membership and a pair of yoga pants or ball shoes are to them.
Hannah Chen, CFA
Phone: (650) 405-5598
About the author:
Hannah is the managing director at EMQQ ETF and EMQQ has a net asset about $1.97 billion; Hannah also works as the CEO of SevenSeas LLC, a Bay Area investment management company focuses on private and public equity investment. SevenSeas has an asset under management about $81 million.
The Emerging Markets Internet & Ecommerce ETF seeks to offer investors exposure to the growth in Internet and Ecommerce activities in the developing world as middle classes expand and affordable smartphones provide unprecedentedly large swaths of the population with access to the Internet for the first time.
The SevenSeas Investment Capital was founded in 2000 and has since developed a rich network of global business partners. They make early and transformational investments in companies that have the potential to do great things. Their dedicated team is made up of seasoned investors who are looking to partner with hard-working, visionary entrepreneurs.