Summary of Key Points
As a high-end sports brand, On has chosen not to discount its products despite the industry trend of using discounts to compete for market share. Although its sales growth slowed in the second quarter (21.6% at a fixed exchange rate), its gross margin increased to 65.4%. Its direct sales channels (official website and physical stores) and the Chinese market have been the main drivers of growth, with China even becoming a testing ground for global expansion. On is also expanding into the clothing business, which saw a 56.2% increase in sales, as it aims to transform from a "running shoe expert" into a high-end lifestyle brand that offers a complete range of products. However, the company faces challenges such as weak growth in the American market and increasing competition from brands like Salomon, Alo, and Nike's premium lines. As a result, its stock price plummeted by 20% due to sales not meeting expectations.
I. Counterintuitive Strategy: Making More Money Without Discounting
In an industry where discounts are common, On has decided against them, with the co-CEOs stating that "discounts are not part of our strategy." They control the inventory levels in wholesale channels to prevent forced discounts and focus on building loyalty through direct sales, as customers value the brand and innovation over price. As a result, their gross margin is exceptionally high at 65.4%—meaning they earn more than 65% per 100 francs sold—significantly higher than their competitors. Nevertheless, second-quarter sales amounted to 850 million Swiss francs, nearly 30 million less than analysts' forecasts, causing the stock price to drop by 20%, the largest daily decline since its listing. Management has also lowered its annual growth forecast from "at least 23%" to "in the low 20% range" but raised the gross margin target to over 65%, indicating a preference for maintaining high prices and profits even at the cost of lower sales.
II. Direct Sales + China: Two Key Drivers of Growth
On's growth relies on two main strategies:
1. Direct Sales Channels (DTC): Direct sales revenue increased by 34.3% in the second quarter, accounting for 45.7% of total sales. These channels allow direct contact with customers, enabling full-price sales and gathering user feedback. Management highlights that DTC customers are very loyal, as they are attracted to the brand's culture and new products.
2. Chinese Market: China is one of On's fastest-growing markets, with a 54.7% increase in sales in the second quarter. The company's Tmall store performed well despite not participating in promotional activities. On has positioned China as its second-largest market, with the Asia-Pacific region manager being promoted to global market director, indicating that Chinese marketing practices (such as community management and physical stores) are being adopted globally.
However, the Chinese market faces pressure: while growth doubled previously, it has now slowed to 61.4% due to a larger base, and more high-end brands (like Salomon, Alo, and Nike's SKIMS) are entering the market.
III. Expanding into Clothing: A New Growth Area with High Prices
Originally focused on running shoes, On is now aiming to offer a complete range of high-end products. The clothing business grew by 56.2% in the second quarter, outperforming the shoe segment for several consecutive quarters. Prices for clothing range from 400 to 800 francs for t-shirts, over 1,000 francs for jackets, and more than 100 francs for socks—all without discounts. The company has collaborated with celebrities, such as the actress Dune, resulting in a successful shoe and clothing line that sold twice as well in the US as expected. Tennis apparel also saw a surge in sales due to signed athletes' performances at major tournaments. Although the clothing business is still small, with revenue of only 170 million Swiss francs in 2025 (2% of Lululemon's), it is growing rapidly and represents an important future growth area.
IV. Challenges Ahead: Slowing Growth and Intensifying Competition
On's high-price strategy faces several challenges:
1. Weak American Market: Although America is its largest market, sales growth slowed to 13% in the second quarter (from 17.1% in the first quarter), leading analysts to question whether consumers find the products too expensive.
2. Intensifying Competition: Brands like Salomon are doing well in China, and Alo's women's clothing sold 10 million units within minutes on Tmall. Nike has launched its premium SKIMS line in China as a global launchpad. All these brands are competing for high-end consumers' wallets.
3. Growth Pressure: To attract new customers, On increased its marketing expenses by 35% (13.1% of sales), but maintaining high prices while expanding the business becomes increasingly difficult.
Management's response is to broaden its price range: entry-level running shoes are priced at 160 dollars, mid-range products at 200-210 dollars, and premium models at over 300 dollars, aiming to appeal to a wider audience without compromising on its high-end image.
Conclusion
On's high-price strategy has not yet failed, but whether it can continue to thrive in the face of increasing competition and slowing growth depends on consumer acceptance and the success of its new businesses. After all, the foundation of a high-end brand lies not only in price but also in product quality and cultural appeal.