adidas Case Study

By: Ray Moorman Dan McLindon Tom Anderson Kyle McDaniel Jeremy Smiley

Primary Question for adidas

Does adidas's corporate strategy, including recent acquisitions and restructuring, stay true to its brand while positioning itself to improve shareholder value and challenge Nike as the leader of the global sporting goods industry?

Secondary Questions• What enabled adidas to be the market leader in the past?• What is happening in the industry and how did adidas lose the

lead to Nike?• What has the adidas brand represented in the past and what

does it represent today?• How has adidas’s corporate strategy changed over time,

specifically before and after the 2005-2006 restructuring?• Have adidas’s acquisitions helped improve their position

against the competition?• What role do developing countries have in adidas's future

success and how is adidas positioned in those countries?• Should adidas be concerned about losing North American

market share to Nike?

What enabled adidas to be the Market Leader in the past?

Product Innovation

Track and Field

• 1925:studs and spikes

• Arch support

• 1949 – molded rubber cleats

• 1952 - screw in spikes

Soccer

• 1954 – screw in spikes

• 1963- Began producing soccer balls

• 1967 – athletic apparel

Results

• Over 700 patents

• Strong reputation among top athletes

• 1970 – leading brand in consumer jogging shoes

Analysis – adidas was an early entrant into athletic shoe industry. They developed many of the features still present in shoes today.

Strong presence in Olympics and soccer.

Created a strong brand based on high quality, innovative products that top athletes choose to use in training and competition.

Marketing Innovation

Gave shoes to German

athletes in 1928

Olympics

2 stripe (and later 3 stripe)

brand

75% of track and field athletes

wearing adidas in 1960

Olympics

78% of athletes wearing adidas

at 1972 Olympics

•Developed strong following with top track and field athletes.

•Applied this same model years later with soccer shoes and apparel.

•Successful because adidas was creating innovative, high quality products.

•Product innovation enabled marketing innovation.

•Different than Nike – marketing is what set them apart from the start.

What is happening in the industry and how did adidas lose

the lead to Nike?

External Environment: PEST

Category Issue Threats/Opportunities Ranking (1-5)

Political Operating multi-nationally – awareness of cultures, laws, image, environment, regulations

Threat- mistakes can be costly 2

Economic Current state of economy – customers may be less willing to pay for higher priced items

Threat – high quality means higher prices 2

Extreme forces in competitor pricing.Opportunity – supply chain

efficiencies and multiple distribution channels

4

Social Keeping up with the wants of the younger generation

Opportunity – Reebok’s strength in this area 4

Technological Product innovation is a key driver in the industry Opportunity – core competency for adidas 4

Porter’s 5 Forces

Threat of Substitutes

Low Bargaining Power of Suppliers

Low

Bargaining Power of Buyers

High

Threat of New Entrants

Low

Intensity of Competition

High

Porter’s Five ForcesFactor Description Impact

Threat of Substitute Products •adidas’s strength is product innovation and meeting customer expectations Low

Threat of New Entrants•Strong presence of established brands and distribution channels•Customers already loyal to their brand•Huge resources required of new entrants

Low

Bargaining Power of Buyers

•Huge number of buyers means adidas must market products effectively•Must be able to differentiate from the competition•Buyers more conscious of their spending •Buyers have access to more information

High

Bargaining Power of Suppliers•Multiple sources of materials for shoes and apparel – commodity status•Suppliers are very dependent on adidas and others•Ease in switching suppliers if necessary and can do so globally

Low

Competitive Rivalry•Recent acquisitions in industry•All competition has global reach – internet and e-commerce•Remaining a leader is expensive – aggressive sales and marketing•Always struggling to get a competitive edge

High

How Did adidas Lose US Market Share to Nike?

Nike

Nike emerging in the 70’s

Aggressive launch new styles – going after youth and fitness craze

Large endorsement contracts – sign Michael Jordan

Focused, aggressive, dedicated leadership

Outsourcing of manufacturing to Asia

adidas

Innovative leader dies in1978 – quality declines, innovation drags

Dedicated to competitive athletes

Passed on Michael Jordan

8 years of management and ownership changes

Costly German manufacturing facilities

How has adidas's corporate strategy changed over time,

specifically before and after the 2005-2006 restructuring?

Adi’s leadership…

Loss of focus…

Focused on athletic footwear/apparel. Success factors are marketing and product innovation.

Focused on Puma, while Nike underestimated. Tries to catch up via acquisitions which yields product breadth instead of specialization.

Return to form via restructuring…

Design and Innovation, differentiated image for brands, improved retail and supply chain

adidas’s Evolving Strategy

adidas’s Current Strategy

Product Innovation

• 1 major product innovation expected per year from each business unit

Brand Differentiation

• Partner with Sporting events

• Notable athletes to sponsor

• Superior Customer service

Controlled Retail

• POS experience

• Able to educate customers

• Various setups:• Mono

brand• outlet• ecomm• team

shops

Supply Chain Efficiency

• New styles quick to market

• Low production costs

• Responsive to market place

Back to Basics Improved advertising, marketing, manufacturing efficiency

What has the adidas brand represented in the past and what

does it represent today?

adidas’s BrandCompany Time Period Brand Success?

Dassler Brothers’ Shoe Factory

1920s → 1940s Innovative athletic shoes for world class athletes

adidas 1950s → 1970s Athletic apparel and innovative footwear for the world class athlete and recreational jogger.

adidas 1980s → mid 1990s N/A – Lack of quality and innovation.

No definable brand essence. adidas-Salomon 1998 → 2005 N/A – Footwear, apparel, and wide

range of sports equipment. No definable brand essence.

adidas AG 2005 → present Performance enhancing athletic

footwear/apparel for competitive athletes and stylish comfortable footwear/apparel for casual lifestyle.

TBD, but trending

adidas is most successful when it has a clear definable brand essence.

A Closer Look at Brand TodaySport Performance Innovation Endorsements Sponsorships (UEFA and Olympics) 80% of branded sales 2007 10% increase in sales in 2007

adidas OverallEurope – Market leader, low growth NA – Small market share, low growthEmerging – Market leader, high growth

adidas AG

adidas

Sport Performance and Europe give the most sales, but Sport Style and emerging markets present the most opportunity.

Sport Style 20% of branded sales

2007Small R&D = large profit 1% decline in sales in

2007

A Closer Look at Brand Today Bad reputation (quality, innovation, styling) Loyal following in women’s general fitnessEndorsements strengtheningSponsorships (NFL, MLB, NHL)Rockport casual men’s shoes~7% decline in sales in 2007 (NA and Europe)Strong growth in Latin America and Asia in 2007

Reebok has baggage from past, but the necessary changes have been made. US is stagnant but other markets show promising growth.

adidas AG

Reebok

A Closer Look at Brand Today Sales in overall industry have declinedProduct innovationEndorsement contracts with PGA Tour prosLeader in drivers, fairway woods, hybridsWeak in irons, wedges, putters, ballsStrong growth in apparel and golf shoes

Performance has been strong overall, but changes in the industry have caused recent declines.

adidas AG

TaylorMade

The Importance of Brand Identityadidas is not a manufacturer. 95% of production is outsourced.

adidas, at its core, is an R&D and marketing firm.

Brand image is adidas’s most important asset.

Have adidas’s acquisitions helped improve their position against

the competition?

Salomon Acquisition: Was it Successful?

Product Line Before Product Line After

Athletic Shoes Athletic Shoes

Athletic Apparel Athletic Apparel

Ski Equipment

Golf Clubs

Bicycle equipment

Winter Sports Apparel

• Conclusion: Paid 1.5bn to diversify product line. Surpassed Reebok as world’s 2nd largest sporting goods company, however…

adidas’s Stock Price

• Stock price fell soon after acquisition in 1998, Salomon divested except for Taylor-Made Golf line. adidas overpaid for acquisition.

adidas after Salomon was divestedProduct Line Before

Product Line After

Product Line After Divestiture

Athletic Shoes Athletic Shoes Athletic Shoes

Athletic Apparel Athletic Apparel Athletic Apparel

Ski Equipment Golf Clubs*

Golf Clubs

Bicycle equipmentWinter Sports Apparel

• Net addition was TaylorMade golf

TaylorMade-adidas Golf Sales by Product Line

Conclusion: TaylorMade/adidas has been able to keep sales up through athlete endorsements even though USGA rules have limited tech advances & an industry decline in the number of golfers.

2007 TaylorMade/adidas Golf Sales Breakdown

Conclusion: Use adidas’s marketing model of track & field/soccer shoes to gain more sales in footwear & apparel.

SWOT Analysis for ReebokStrengths Impact Weaknesses Impact

Strong in hockey, football and baseball

Allows adidas to enter new sports in NA market

Poor reputation for quality and innovation

May damage adidas brand and reputation

Loyal female customer base Cross sell adidas products

Greg Norman golf apparel brand

Divested shortly after acquisition

Past success in marketing Leverage to address area where adidas has at times been weak

Limited distribution channels

Area for adidas to focus if it wants to grow Reebok

Strong stable of professional athlete endorsements

Bolster existing endorsements that adidas has

SWOT Analysis for ReebokOpportunities Impact Threats Impact

Encouraging sales growth in Latin America and Asia

Pairs nicely with adidas strength abroad

Possibility of cannibalization if sold in same place as adidas products

No effect on bottom line but could impact brand image of both

Economies of scale with adidas supply chain and distribution

Get Reebok products in front of more people

Still third in market share in its strongest market, North America

Question must be asked if Reebok is still viable brand

Use Reebok and adidas brands to target separate markets – utilize current distribution networks

Reebok as an entry level, progress to adidas

Reebok Acquisition adidas Reebok

Football

Baseball

Hockey

Soccer

Running

Basketball

•On paper it looks like Reebok’s product portfolio, endorsements and relationships round out adidas and together they can join forces to overtake Nike.

•Issue is can management overcome Reebok’s reputation for poor quality and lack of innovation?

•Can two companies come together with such different cultures and focus?

•adidas – product innovation and commitment to quality•Reebok – marketing focus

What role do developing countries have in adidas's future

success and how is adidas positioned in those countries?

adidas is a global player

43%

29%

22%

6%

Net Sales by Geographic Region

Europe

North America

Asia

Latin America

•43% of sales from Europe, which is slowest growth market

•Encouraging that #1 in developing eastern European market, Russia expected to be most profitable market in Europe by 2010

•2006 acquisition of Reebok not enough to overcome Nike in North America

•Growing number of sales in Asia market, fueled by adidas success in China.

•Strong demand and large population

Net Sales in Emerging Markets

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005 2006 2007

Asia

Latin America

Analysis – strong growth trend in sales in two very attractive emerging markets. Growth may be result of adidas brand strength in soccer, world’s most popular sport.

Regional Footwear/Apparel Markets

Region Size Market Growth

Rate

adidas Sales adidas Sales Growth

adidas Position

North America

$42.5 billion 3% $2.9 billion 5% #2 behind Nike

Europe N/A 2% (20% Eastern Europe)

$4.3 billion 8%, mainly in Russia

#1

Asia 3.2 billion people

13% (South and Central) 15% (China)

$2.2 billion 17% #1

Latin America

N/A N/A $657 million 39% #2 behind Nike

Analysis – adidas is strong in several developing markets (Eastern Europe, China) but its focus and acquisitions have been geared towards overtaking Nike in the large, but slow growth North America market.

Should adidas be concerned about losing North American

market share to Nike?

U.S. Retail Store Strategy

Opportunity for U.S. brand strategyReebok’s revenue fell 5.7% during timeframeOpportunity to convert adidas locations to Reebok retail stores and focus growth of adidas internationally.

2007

Reebok – 430 Locations adidas – 1003 Locations

2006

Reebok – 283 Locations adidas – 875 Locations

adidas AG Geographic Revenue Performance

2004 2005 2006 2007€ 0

€ 500€ 1,000€ 1,500€ 2,000€ 2,500€ 3,000€ 3,500€ 4,000€ 4,500€ 5,000

3.2%

31.5%5.0%

17.6%

106.4%-9.4%

27.8%32.6%

11.6%

1229.2% 56.4% 31.7%

EuropeNorth AmericaAsiaLatin America

Key Growth Potential:Europe – continue focus on soccer (including endorsements) and build brand loyaltyAsia/Latin America – increase distribution network and brand awareness - All three regions averaging double-digit growth rates

*Acquired Reebok

TaylorMade Advantages

Shift to International Markets

Strength in Metalwoods

Strong Apparel Presence

Revenues from Asia:1999 – 13% of total2007 – 35% of total

Decreasing reliance on U.S. Market:1999 – 69% of total2007 – 52% of total

Metalwoods currently hold number one ranking.

Irons hold less than half market share of industry leader

Golf balls have seen limited success

Over 70 touring pros lift apparel presence.

Conclusion – TaylorMade should hold U.S. market share in U.S. given the brand’s strengths, however, TM is only 8% of adidas AG global revenues. TM cannot help adidas overtake Nike in U.S. market

adidas69%

Reebok23%

TM8%

adidas Global Revenue Sources (2007)

42.8%22.1%

6.4%

EuropeNorth AmericaAsiaLatin America

N.A. market 28.7% of revenues

Remaining regions = 71.3% of revenues

Conclusion – The majority of adidas’s revenue streams are outside U.S. market and are growing significantly – let Nike lead U.S. market but dominate Europe and emerging markets.

Reebok Global Revenue Sources (2004)

21.4%

12.5%

54.7%

11.4%

EuropeUnited KingdomUnited StatesOther Countries

U.S. market 54.7% of 2004 revenuesConclusion – Use adidas’s

control and production efficiencies to enhance Reebok’s distribution network in U.S. to increase U.S. revenues.

Q:

•Does adidas's corporate strategy, including recent acquisitions and restructuring, stay true to its brand while positioning itself to improve shareholder value and challenge Nike as the leader of the global sporting goods industry?

A:

•The strategy is strong and refocused on innovation, brand image, retail experience, and supply chain efficiency. adidas is well positioned to have a stronghold on #2.

But…

•What could adidas change in regards to their corporate strategy to improve value to a greater degree and actually challenge Nike?

• Use adidas as revenue driver outside of U.S. market – restructure Reebok strategy to capitalize on historic revenue performance in U.S. – Decrease number of adidas retail outlets in U.S. -

convert to Reebok retail– Increase Reebok U.S. endorsements

• Use adidas global distribution to further increase TaylorMade international revenues

Recommendations

Recommendations

• Be satisfied with #2 in the U.S. market.– “Nike is Nike and will continue to be Nike”

• Focus on strong growth potential in Europe, Asia, and Latin America.– Increase distribution networks in these markets– Increase brand loyalty and brand awareness in

these markets through contractual endorsements with athletes