Deal focus: Tutwo cuts out the middleman

China's sportswear retailers have struggled in recent years due to excess middlemen. Brand owners, material suppliers and original equipment manufacturers (OEMs) sit at the top of the supply chain and their goods reach the stores through layers of wholesalers or regional distributors and then local brokers. Information flows back up this chain but slowly and in piecemeal form. It means brand owners cannot respond fast enough to changing market conditions, resulting in piles of unsold products.

Tutwo Outdoor wants to eliminate this issue by removing intermediates and consolidating supply chains. Last week, the company received RMB200 million ($30 million) from CDIB Capital to make this happen. It is the first institutional round after strategic funding from Shenzhen-listed Toread Outdoor Products, China's largest outdoor sportswear brand, in 2014.

Established in 2006, Tutwo is China's only nationwide outdoor sportswear retail chain, with more than 800 directly-owned stores and over 1,000 franchised outlets. "The outdoor sportswear segment is very fragmented, and there aren't many strong brands that cover every category of activity. Those outdoor brands tend to be very small and difficult to reach scale on their own," says Gary Liu, CFO of Tutwo.

This dominance in a niche market makes the company's ambition to cut out middleman all the more realistic. Tutwo wields significant influence over the 300 brands it stocks, most of which are local labels. It drives the engagement process - paying a royalty for licensing rights, working with brands to co-develop products, or developing its own brands - and then ships directly to its stores, so there is no longer a role for wholesalers or brokers.

And by taking the lead in production as well, Tutwo is able to leverage a network of upstream suppliers covering everything from fabrics to buttons. "It could be the case that Tutwo can get cheaper prices from suppliers than the OEMs through their existing networks," says Victor Gao, managing director at CDIB Capital.

The latest round of funding will go towards expanding the retail base, as well as upgrades to IT and logistics systems that facilitate the company's end-to-end supply chain model. Meanwhile, on the demand side, Tutwo wants to bring in more international brands, as exemplified by its recent partnership with Italian mountaineering firm Salewa for a China roll-out.

The country's outdoor retail market was said to be worth RMB22.2 billion in 2015, having posted average annual growth of 25% over the previous five years. Gao expects this to be sustained by increasing interest among the younger generations, who are adopting healthier lifestyles, and Tutwo will tap into this trend by organizing sporting events and adventure trips for customers.

"I was amazed by how many young people are registered for marathon races," Gao adds. "They use mobile apps to track how far they run each day and post the results on WeChat."

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• Topics
• Greater China
• Consumer
• Growth
• China
• CDIB Capital