The Wall Street Journal Education Program
Weekly Review & Quiz
Covering front-page articles from June 24-30, 2006
Professor Guide with Summaries Summer 2006
Developed by: Scott R. Homan Ph.D., Purdue University
Questions 1 – 12 from The First Section, Section A
A Big Shot in China
By STEPHANIE KANG in Cleveland and GEOFFREY A. FOWLER in Hong Kong
June 24, 2006 Page A1
http://online.wsj.com/article/SB115100736891387899.html
In the National Basketball Association, Cleveland Cavaliers' guard Damon Jones is a journeyman who averages 6.8 points per game and toils in the shadow of his superstar teammate, LeBron James. But on Tuesday, Mr. Jones will land in Beijing and be greeted as a star.
Despite his low profile in the NBA, Mr. Jones has a plum deal endorsing a line of basketball shoes for China's Li Ning Co., the country's leading domestic athletic-shoe brand. Mr. Jones has never been to China, and speaks just one Chinese phrase: Yiqie jie you keneng -- "anything is possible," the Li Ning advertising slogan.
Already, less than six months after striking the deal, Mr. Jones's face appears on Li Ning billboards and on Chinese television, where he recites his Mandarin-language phrase on highlight reels broadcast with NBA games.
A Damon Jones signature shoe, which is likely to be available later this year only in China, is Li Ning's attempt to keep pace with its global rivals. Nike Inc. is endorsed in China by Mr. Jones's famed teammate, Mr. James, and Adidas AG's Reebok International Ltd. has a long-term deal with Yao Ming, the popular Chinese national who plays for the Houston Rockets.
Mr. Jones's deal shows how some Chinese companies are fighting back against global giants on their home turf. Li Ning's goal isn't to conquer America, but to take back China. Named for an Olympic gymnastics hero of the 1980s, Li Ning is one of China's best-known domestic brands. But aggressive incursions by Nike and Adidas in recent years have knocked Li Ning to No. 3 from No. 1 in China's athletic-shoe market.
Basketball's exploding popularity in China -- the NBA now considers China its second-biggest market -- has turned the nation into the next battleground in the global sneaker wars. "If you want to build and be a very cool brand, it happens through basketball," says Abel Wu, Li Ning's vice president of marketing and international business. Five years ago, Li Ning, which is listed on the Hong Kong stock exchange, didn't have any professional-grade basketball products at all. Today, the basketball category accounts for 20% of its sales.
Mr. Jones, a 29-year-old who has done time in basketball's minor leagues and has played for 10 different NBA teams since 1998, was far from an obvious choice for Li Ning. But most of the NBA's biggest stars already had sneaker deals, and Li Ning felt it couldn't afford any of those who didn't. The company found its way to Mr. Jones after first working with the NBA to come up with a list of potential candidates who were available and affordable.
Mr. Jones says his career path, which he describes as "all uphill," is one reason he appealed to Li Ning. He describes himself as "a guy who wasn't drafted," whose career demonstrates to young people "that if you work hard enough, it can happen for you."
Mr. Jones, the eldest of four children from a middle-class Galveston, Texas, family, was one of the highest scorers ever for the University of Houston. But he was passed over in the NBA draft in 1997 when he left school after his junior year, and found himself earning $450 a week playing for the Black Hills Posse in the International Basketball Association. After he made his NBA debut in 1999, he hopscotched from team to team, unpacking and repacking in New Jersey, Boston and Dallas, among other stops.
Finally, after a successful 2004-'05 season with the Miami Heat, he landed a four-year, $16.1 million deal with the Cavaliers. Mr. Jones moved into a seven-bedroom home outside Cleveland, where his closet holds more than 200 suits and his garage holds a silver Mercedes-Benz SL600.
To Li Ning, Mr. Jones's career seemed to fit its "anything is possible" slogan. It offered him the kind of shoe deal that Mr. Jones concedes would be nearly impossible for him to get from the likes of Nike or Adidas. The contract pays Mr. Jones an annual salary of between $200,000 and $300,000, and offers bonuses tied to personal and team performance, according to people familiar with the deal. That's small change compared with the $100 million that Nike agreed to pay Mr. James over seven years. But for many NBA players, a sneaker endorsement often means free gear and minimal money.
The contract puts Mr. Jones in the unusual position of wearing and endorsing shoes that won't be sold in the U.S. When his signature shoes go on sale, he will also earn royalties -- a provision typically enjoyed only by the NBA's superstars.
Li Ning and its competitors see the 2008 Olympics, slated for Beijing, as a potential marketing bonanza. Li Ning wants to capture China's growing basketball fan base, which now rivals that of such popular Chinese sports as table tennis and badminton.
Chinese have played basketball for decades, but the sport's popularity has exploded recently. In the 1980s, in an effort to nurture interest in China, the NBA began allowing Chinese broadcasters to broadcast games for a small fee. Mr. Yao's jump to the NBA from a Chinese league in 2002 further fueled fan interest, which soared in 2004 when the NBA organized two games in China between Mr. Yao's Houston Rockets and the Sacramento Kings. The marketing muscle of Nike and Adidas added to the momentum.
With more than 400 million people under the age of 21, China is one of the world's fastest-growing sporting-goods markets. According to Chinese sports-marketing firm Zou Marketing, Nike leads the market with annual sales of $410 million, followed by Adidas, with $385 million. Li Ning is third with $300 million. Li Ning also faces local competition from companies such as Anta, based in Fujian province, which has $100 million in sales and a sponsorship deal with the Chinese Basketball Association.
Terry Rhoads, a Zou managing partner, says he expects the market to grow by 20% to 40% a year for the next decade. Dominance in basketball, he says, will help determine who will be the biggest athletic-shoe brand.
In China, all basketball sneakers are manufactured by the same companies under outsourcing arrangements, says Li Ning's Mr. Wu. "In terms of quality, we are the same" as international brands, he contends. "But our brand doesn't have a very strong image yet."
To woo young consumers, Li Ning has boosted spending on marketing. Nielsen Media Research estimates that the company has increased advertising spending more than 20-fold between 2001 and 2005. Nevertheless, Li Ning's ad spending remains only about a third of Nike's 2005 China budget of about $37 million, says Nielsen Media Research, which based its estimates on published rate-card data.
Marketing in China can be complicated. In 2004, complaints from some consumers caused the Chinese government to ban a Nike TV commercial in China featuring Mr. James, Mr. Jones's teammate, beating a cartoon kung fu master in a battle. The government cited "indignant feelings among Chinese consumers."
But Chinese teens are also huge fans of foreign brands and lifestyles. With basketball gear, they associate street credibility with American stars, not Chinese pros. The jerseys of NBA stars Tracy McGrady and Allen Iverson now outsell Mr. Yao's jersey in China, the league says. "The NBA is cooler than the CBA, because the NBA's performances are full of passion and skill, and the players have magnificent physiques," says He Zizhang, a 15-year-old Beijing middle-school student who says he plays basketball daily and watches NBA games at least twice a week.
Nike and Adidas are rapidly opening retail stores in China. Nike has signed an up-and-coming Chinese basketball player, Yi Jianlian, whom some people in the basketball world are calling the next Yao Ming. Nike also plans to bring top NBA players to China later this summer.
1. Cleveland Cavaliers' guard Damon Jones has a plum deal endorsing a line of basketball shoes in ________.
a. France
b. Korea
c. Taiwan
d. China Correct
2. Cleveland Cavaliers' guard Damon Jones speaks just one Chinese phrase: Yiqie jie you keneng which translates in English to __________.
a. the shoes are great
b. anything is possible Correct
c. fly with the shoes
d. no gravity boundaries
Lost Sparkle Chasing Upscale Customers Tarnishes Mass-Market Jeweler
By ANN ZIMMERMAN and KRIS HUDSON
June 26, 2006; Page A1
http://online.wsj.com/article/SB115128487853890421.html
DALLAS -- In early January last year, after a disappointing Christmas season and amid worries about competition from discount retailers, Zale Corp. decided to shake things up: The self-proclaimed jeweler to Middle America was going to chase upscale customers.
In a few months, Zale drew up a plan that involved replacing almost a third of the merchandise at its Zales Jewelers division. To dodge a battle with retailers such as Wal-Mart Stores Inc., Zales dropped inexpensive, low-quality diamond jewelry for fashionable 14-karat gold and silver pieces with higher margins. It started buying direct from overseas dealers, cutting out U.S. middlemen, and even dumped a decades-old marketing slogan: "The Diamond Store."
The move was a disaster. The Irving, Texas, retailer lost many of its traditional customers without winning the new ones it coveted. A second poor Christmas badly dented the company's annual profits. Within weeks, Zale's chief executive officer, Mary Forté, was forced to resign, according to people familiar with the matter, and the U.S. Securities and Exchange Commission started investigating Zale's accounting.
Sensing weakness, Zale's archrival, the United Kingdom's Signet Group PLC, made an unsolicited merger approach this spring, which Zale rebuffed. Signet last year passed Zale to become the U.S.'s largest retailer specializing in jewelry. (See related article1).
Throughout its 82-year history, Zale has mirrored and occasionally led changes in American retailing. In the 1920s, it kick-started the mass-market jewelry trade. After World War II, it moved out of cities and into burgeoning suburban malls. Now it's joined the ranks of businesses that, spooked by competition from mass retailers, have struggled to go upscale.
J.C. Penney Co., the quintessential middle-class merchant, ran into trouble a decade ago when it turned to pricier designer clothes and home furnishings that alienated customers. Last holiday season, Limited Brands Inc.'s Bath and Body Works unit suffered slumping sales as it struggled to determine the right mix of merchandise and promotions to convey its shift upscale. And Pier 1 Imports Inc., the home furnishing retailer, this year introduced sleeker products to combat discount operators, but the changes have yet to boost sales.
Founded in 1924 in Wichita Falls, Texas, by M.B. Zale and his brother William, the company grew through the brothers' decision to offer friendly service and liberal credit terms to the working class. The deal they offered: a penny down and $1 a week. After World War II, Zale furiously bought up other stores and smaller chains.
The company's divisions include Piercing Pagoda, which runs mall-based kiosks selling jewelry to teens, Zales Jewelers, for working-class mall shoppers, the upscale Gordon's, and Bailey Banks & Biddle Fine Jewelers, which sells even pricier products out of fancier malls.
In the late 1980s, the Zale family cashed out, giving up control of the company. In recent years, discounters such as Wal-Mart and J.C. Penney were grabbing an increasing amount of the jewelry business. At the same time, Internet retailers and TV shopping networks were selling more diamonds and other fine jewelry, encroaching on Zale's turf.
Ms. Forté, now 55 years old, headed the company as the industry shifted. She had come to Zale after stints at home-shopping channel QVC, a unit of Liberty Media Corp., and Federated Department Stores Inc. At Zale, she headed Gordon's, where she successfully introduced pricier watches and other items. "Upscale products were in Mary's DNA," says a former colleague.
While Zale was losing its momentum, Signet, its chief rival, was doing well. Signet's roots stretch to 1949, when Leslie Ratner opened his first jewelry shop in Richmond, just outside of London. The retailer entered the U.S. in 1987 with its purchase of Sterling Inc., a 117-store chain. It bought Kay Jewelers in 1990 and launched Jared the Galleria of Jewelry in 1993, which was designed to appeal to people who don't like malls.
Key to Signet's success was its decision to buy less expensive cut diamonds and finished products directly from overseas suppliers, rather than relying on the middlemen that long characterized the jewelry business. Tapping new diamond centers in countries such as India, Signet now buys directly more than half the products it sells to consumers. The Zales Jewelers division -- which accounts for the majority of the Zale Corp.'s sales and profit -- by contrast, buys only about 5% that way.
With the savings, Signet ploughed money into marketing and staff training. It blanketed the airwaves with commercials equating jewelry with romance through the tag line: "Every Kiss Begins With Kay."
"Signet continued to evolve and get stronger, but Zale hadn't evolved or changed with the landscape as much," says David Sternblitz, Zale's current treasurer.
When Zales Jewelers missed its 2004 sales plan for the Christmas season -- the year's most important period, accounting for more than half its sales and almost all its profit -- executives concluded it was time to do something drastic. Discount retailers like Wal-Mart, they worried, were dominating sales of low-priced jewelry.