The Adidas Group is targeting annual sales of €5 billion in North America by 2020, a jump of nearly 50 percent compared with a turnover of €3.4 billion for the Adidas and Reebok brands last year.
The target was outlined at an Investor Day held by the Adidas Group in Herzogenaurach on March 14. Earlier this month Kasper Rorsted, who became the group's chief executive last October, already announced upgraded targets for the Adidas Group's five-year plan, Creating the New, projecting total sales of €25 billion to €27 billion by 2020, up from the previous target of about €22 billion.
While the sales target remained unchanged for the Reebok brand, the Adidas brand is apparently expected to deliver much of the extra sales in North America. It already enjoyed a sales jump of 30 percent in the region last year to €2,897 million, after substantial over-investment in the U.S. market. The Adidas brand is estimated to have doubled its footwear market share in the U.S. last year, driven by avid demand for its fashion products and Boost footwear. Sales of its Originals products soared by 80 percent in constant currencies, they were up by 40 percent for running products and by 25 percent for U.S. team sports products.
However, Rorsted acknowledged that the sales jump was made easier by the Adidas brand's weak market share in North America. Nike reported a turnover of nearly $14.8 billion in North America for its last full fiscal year, until the end of May 2016, while Under Armour chalked up sales of $4.0 billion in the same region last year. The Danish chief executive emphasized that Adidas had not managed sustainable growth in the U.S., and that the group's latest efforts amounted to an investment for the long term.
The Adidas group said it would continue to over-invest in North America, although some of the investment should shift from endorsements to retail activations. Another key focus is to adequately manage the brand's sneaker franchises. The group wants to reinforce relationships with key retailers such as Foot Locker and Dick's Sporting Goods, and to zero in on key markets such as Los Angeles, New York, Atlanta and Chicago. The Adidas group previously announced that it aimed to quadruple revenues from online sales to €4 billion in 2020, which should strongly contribute to the North American sales rise as well.
The Reebok brand saw its North American sales decline by 2 percent to €514 million last year, down by 1 percent in dollars, but the fitness brand is expected to take part in the North American growth and to deliver improved profits, on the back of the Muscle Up program described earlier. The group has already closed 20 out of the 50 factory outlets it intends to shutter. It should apply to Reebok some of the recipes that have propelled the Adidas brand in the last two years, such as a stronger focus on key accounts. The closure of Reebok's oversized head office in Canton, its move to Boston and the concentration of regional group functions in Portland, at the head office of Adidas North America, are meant to help the Reebok management sharpen its focus as well.
Taylor Made Adidas Golf (TMAG) and CCM Hockey are not included in the figures, because both of them are for sale. The group already confirmed its intentions to spin off the golf equipment business last year, and the divestment of CCM was announced earlier this month as part of Rorsted's efforts to further streamline the company.
The Adidas group reported a jump in the operating margin for the Adidas and Reebok brand in North America last year, up by 3.8 percentage points to 6.3 percent. That leaves quite a gap to the target outlined for the entire group to raise its operating profit margin to about 11 percent by 2020, up from 7.7 percent in 2016. The upgraded targets called for profits to outgrow sales, at an annual average growth rate of 20 to 22 percent, compared with a target to expand sales at an average annual rate of between 10 and 12 percent in constant currencies.
Adidas provided some more insights into measures to achieve this, with savings in areas such as logistics and purchasing, and more “speed-enabled” products. About half of the products should be “speed-enabled” by 2020, meaning that the group may adjust and replenish rapidly in case of strong demand – although this does not imply that half of the group's sales should come from such products.
The bullish target regarding online retailing will require some extra investments as well. Capital expenditure will reach more than the habitual range of 3.5 percent to 4.5 percent of sales this year, as the company has budgeted spending of €150 million on distribution centers to support this push, and another €150 million on the expansion of the North American head office. Extra money will go on controlled space in stores operated by retail partners, and digital infrastructure.
Rorsted clearly regards digital transformation as a key aspect of the changes to be implemented at Adidas, in terms of supply chain and distribution as well as marketing. He described the acquisition of Runtastic as an important driver for this transformation, as it helps the company to understand and harness digital technology and creates more direct relationships with consumers. Further details on the group's upgraded targets and results for 2016 were published in the previous issue of SGI Europe.
