603555.SHG
Guirenniao will focus its resources on grain business

The well-known sports name called it quits after years of losses, ending a once-remarkable run fueled by demand from China’s growing middle class 

Key Takeaways:

  • Guirenniao will wind down its sportswear business and focus on grain trading in the future 
  • The company’s grain business accounted for more than half of its revenue in the first half of this year

 

By Lau Chi Hang

On Sept. 23, Shanghai-listed Guirenniao Co. Ltd. (603555.SH), once a leader in China’s increasingly competitive sportwear market, raised some eyebrows when it published an announcement of a major strategy shift. 

“The company will seize on a national strategic opportunity presented by a comprehensive revitalization taking place in a new era for Northeast China, taking the grain business as its main future development thrust,” it said.

But that was just the beginning of the surprises from a company once considered China’s “first domestic sports brand stock.”

“The company will optimize and adjust its sports shoe and apparel business, and … will dispose of its brand assets such as Guirenniao and Prince through authorization and licensing agreements, sales and leasing,” it continued. “It will gradually withdraw from the sports shoe and apparel business.” 

Chinese sportswear fans are quite familiar with Chendai, a town in southern Fujian province whose name is synonymous with sportswear manufacturing and is the birthplace for many of the country’s big homegrown brands. 

Guirenniao is one of those, led by founder Lin Tianfu. Once the richest man in the nearby Fuzhou city of Quanzhou, Lin started out making sportswear for other companies in the 1980s, before moving into the more lucrative business of building his own brand. Guirenniao had a good run for a long time by focusing on China’s less-affluent smaller third and fourth-tier cities.

Lin put his business acumen to work by signing big local celebrities like Andy Lau, Cecilia Cheung, and Lin Chi-Ling as brand ambassadors, building Guirenniao into a household name with 5,000 outlets at its peak.

The company’s strong run with Chinese consumers was reflected in its market value, which reached nearly 40 billion yuan ($5.84 billion) at its peak, far higher than Hong Kong-listed rivals Anta Sports (2020.HK) and Li Ning (2331.HK). But what caused Guirenniao to fall from grace less than a decade later, to the point where it not only flirted with bankruptcy but also gave up on sports completely?

Greed and dubious deals

After its listing on China’s domestic A-share market, a cash-rich Guirenniao and founder Lin were filled with ambition. Not satisfied with just sports shoes, Lin began building a chain of related businesses to take advantage of Beijing’s strong support of the sports industry at that time.

The cash-rich Lin soon became the second largest shareholder of Hupu, a popular Chinese sports forum, invested in Spanish soccer agency Boy, and bought another shoe seller called S.cn, among other things. All said, he poured billions of yuan into almost everything and anything related to sports, the internet, games and fitness. Later, he capriciously ventured even further afield by setting up Ankang Insurance.

Right or wrong, such buying sprees can only succeed if funds are used effectively, which usually includes strong implementation of a broader strategy. But Lin was too aggressive and blinded by his ambitions, making new deals before the last ones had even closed. As the company’s funds dwindled and new businesses failed to gain traction, Guirenniao ultimately found itself with cash flow problems that left it swimming in debt.

Selective consumers 

Meantime, Chinese consumers began to become more selective about their sportswear and athletic shoes as the country’s middle class became more established. Fashion and big names aside, consumers also began to value functionality in their purchases, forcing brands to bring better technology and diversify their product lines to meet the needs of different sports.

In the face of that transition, Lin remained so focused on his ambition of building a sports empire that he forgot his original inspiration in making products the market wanted. Rather than focus on improving his sport shoes and apparel, he devoted his time, energy and capital to almost everything else, diverting resources from new product development, distribution and promotion.

Even as rivals Li Ning, Anta and Xtep (1368.HK) were improving their products by trying to better understand evolving Chinese fashion sense, Guirenniao was falling further behind. By now, most consumers generally still believe in the Guirenniao name and its products. But they also think its styles lag behind. As a case in point, the company was three years behind its peers in rolling out its first carbon plate running shoes.

In the process of trying to revolutionize China’s sports industry, Lin Tianfu appears to have forgotten about his customers, who are less concerned with his wild vision and simply want products that are relevant, good-looking and comfortable. Put differently, Lin forgot that it’s all about the products.

Betting on agriculture

As its sports business foundered and it kept spending on new purchases, Guirenniao posted more than 2 billion yuan in cumulative losses in the three years from 2018 to 2020. By 2021, crushed by heavy debt and operating difficulties, Guirenniao was forced into a court-led reorganization. That ultimately included the sale of 20.4% of its shares to Taifujingu Network Technology, making the grain trader based in Northeast China’s Heilongjiang province the company’s second-largest shareholder.

Taifujingu’s “grain tycoon” boss Li Zhihua gradually took over as Guirenniao’s actual manager after its reorganization. In that capacity, he began to lead the company into food-related businesses by, for example, establishing a Shanghai-based company engaged in the trading of commodities like soybeans and corn. In March this year, Guirenniao also entered the market for ready-made dishes by investing 100 million yuan to set up an industrial park specializing in such dishes in the Heilongjiang city of Qiqihar.

When Guirenniao announced its latest financial results, its loss had narrowed to 18.1 million yuan in the first half of this year. That came on a continued contraction for its sports shoe and apparel business, whose revenue fell 19.5% year-on-year to 232 million yuan. Its grain business moved in the other direction, jumping 43.5% to overtake the sports business with 342 million yuan in revenue.

Guirenniao’s decision to leave behind its sporting roots may be prudent, since China’s sportswear industry has become a bloodbath these days. Facing such long odds, the company’s turn to a newer niche track with good profit potential and an experienced shareholder seems to make more sense. Under the guidance of Li Zhihua, with his solid base in the grain industry, Guirenniao may yet rise again to fame in a newfound form.

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