Summary of Key Points
In an environment where consumers are cautious and sports brands are generally discounting to clear inventory, the Swiss sports brand On has taken the opposite approach: they have insisted on selling products at full price without any discounts and have even increased prices. Despite this, they achieved a 12-fold increase in net profit (to 208 million Swiss francs) in the first half of 2026, with a 14% increase in net sales. The Asia-Pacific market, led by China, was the biggest contributor to this growth (with a 43.7% increase). However, there are underlying concerns: the growth rate in the North American market has plummeted, inventory levels are high, and there have been complaints about product quality. Additionally, its customers are not genuine runners but rather see the brand as a symbol of middle-class status. The stock market has not been supportive of this strategy, with the stock price plummeting by 20% on the day of the financial report release, raising doubts about the sustainability of On's "elite" image.
I. Pricing Up in a Downward Market? Full-Price Strategy and Direct Sales Channels Are the Keys
On's policy of not offering discounts is not just empty talk; management has made it clear that "price cuts are never part of our strategy." They would rather sell fewer products than let them be discounted. This approach has led to substantial profit increases: the gross margin in the first half of 2026 was 64.8% (65.4% in the second quarter), far exceeding that of Nike (49.2%) and Adidas (52.5%), even leaving Lululemon, known for its high prices, behind.
Why can they afford to be so aggressive? It's because they have a strong grip on direct sales channels (DTC). From 2021 to the second quarter of 2026, the proportion of direct sales revenue increased from 38% to 45.7%, with China being a priority for new stores—half of all new stores opened globally are in China, and the number is expected to exceed 100 by the end of 2026. Direct stores have the final say on prices and when products are taken off the shelves, avoiding the influx of discounted products and maintaining the brand's premium image.
II. Why Is the Chinese Market So Hot? It's About the "Middle-Class Status Symbol" More Than Running
On's popularity in China has little to do with running. Data shows that only 0.2% of elite runners at the Beijing Marathon and 1.9% at the Shanghai Marathon wear On shoes, far lower than the percentage for Nike. The most common discussions on social media focus on the comfort of the shoes for commuting, their suitability with suits, and the fact that they are worn by influential figures such as Lei Jun and Liu Qiangdong. Netizens joke that wearing a cheap shirt with a thousand-dollar On shoe makes you feel like a billionaire.
In essence, On sells more than just running shoes in China; it sells an "identity symbol." Wearing On is a way to signal to others that you are an urban elite with good taste and a sense of relaxation. The firm price is actually an advantage; if prices were frequently discounted, On would blend in with Nike and Adidas, losing the sense of exclusivity that comes with a higher-end brand. Moreover, the target audience (middle-class and business professionals) is not sensitive to prices in the range of 2000 yuan.
III. Behind the Glitz: Problems in North America, High Inventory, and Quality Issues
On is not without its challenges:
1. North American Market Slump: The growth rate in North America dropped from 24.3% to 3.8% in the second quarter of 2026, and this market is crucial for On. If it fails there, the rapid growth in the Asia-Pacific market won't be enough to compensate.
2. High Inventory: Inventory increased by 30% year-over-year at the end of the second quarter, twice the rate of sales growth (13.5%). Management claims to be actively controlling inventory to maintain prices, but if demand declines, the pressure will increase.
3. Quality Issues: There have been nearly 200 complaints in China, with many on platforms like Rednote mentioning issues such as squeaky soles that make walking uncomfortable. American consumers have also filed lawsuits alleging false advertising, claiming structural defects in the midsoles. The brand's response to these issues has been rather unconventional.
IV. How Long Can the "Elite Image" Hold?
The stock market has already shown skepticism, with the stock price falling by 20% on the day of the financial report release, the largest drop since the company went public. Investors are concerned about two main issues: slowing growth (from 43% in 2025 to 22.6% in 2026) and the sustainability of On's "elite" image.
On is trying to mitigate these issues by collaborating with actress Zendaya to expand its customer base through the entertainment and fashion industries, but this is still a promotional strategy. The problem is that as prices rise (with high-end models exceeding 2000 yuan), consumers may question the brand's value. Its technology is not considered innovative (the cushioning system was used by other brands decades ago), and quality issues have emerged. If middle-class consumers feel the brand is not worth the price, they can easily switch to a different brand.
After all, even Lululemon's growth rate in China has dropped from 46% to 30%. It's uncertain how long On's "China Years" strategy will be successful.
(End of translation)