Speed, cities and open sources are some of the key words in “Creating the New,” the five-year strategic plan outlined by managers of the Adidas Group at their investor day conference, which was held at the company's head office in Herzogenaurach last Thursday, March 26.
The wide-ranging plan aims to lift the company's turnover at high-single-digit rate on average per year in constant currencies for the five years starting from 2016, as compared with this year's projected turnover. This would imply sales of more than €22 billion in 2020, assuming stable currencies.
This hike in turnover should be driven by high single-digit sales increases per year on average for both the Adidas and Reebok brands, outperforming the market. Taylormade Adidas Golf (TMAG), which saw its sales shrink by 28.9 percent last year, is expected to outperform a more or less stagnating market to deliver an average growth in the mid-single digits per year over the five-year period.
The Adidas group's net income is to increase faster, at an annual average rate of 15 percent, over the same period. It eventually wants to reach an operating margin in the double digits but the management refrained from issuing specific targets, in order to remain more flexible. The previous plan called for a sustainable operating margin of 11 percent, and the Adidas group's failure to deliver on that last year was one of the most important gripes among its shareholders.
Investors were told that the group's cash flow should grow at a faster rate than the operating profit in each of the next five years. The company's robust financial position and the projected cash generation encouraged the management to raise its targeted dividend payout ratio to 30 to 50 percent, compared with a previous range of 20 to 40 percent.
The group's new strategic plan comes after a turbulent year in which Adidas had to admit that it would not reach the initial targets of its previous five-year plan. Route 2015 called for the group's turnover to reach €17 billion this year, but the tally amounted to €14.5 billion in 2014 and is predicted to expand by a mid-single digit rate in constant currencies this year. The Nike brand has considerably widened the gap with Adidas in terms of sales in the last few years.
Herbert Hainer, the Adidas group's chief executive, emphasized that Route 2015 had yielded some impressive results, particularly in emerging markets, in retailing, with the Neo label and through an increase of nearly €5 billion in market capitalization. Yet Hainer readily admitted that the group had not sufficiently focused on consumers and under-invested in the U.S. market – where the Nike brand most markedly gained share against Adidas.
Aiming to boldly tackle both of these issues and more, the new plan appears to be driven by a cohesive team around a duo of new board members: Eric Liedtke, in charge of global brands, and Roland Auschel, in charge of global sales. Hainer said earlier this year that he would leave the company in March 2017 at the latest.
The Adidas brand stands to benefit most from the far-reaching changes advocated by the group's managers for its marketing and sales approach, as detailed further. Among the targets for the Adidas brand, the group wants to double its sales of running products by 2020 while retaining leadership in football. Sales of Originals are meant to expand by 50 percent, while women's products are to become a more important part of the business.
When it comes to Reebok, Hainer admitted that it had taken far too long for the group to find the adequate positioning for the brand. The group says that it has completed Reebok's transformation into a fitness brand – from the end of this year the brand should have fully pulled out of other sports.
Reebok wants to invest further in fitness partnerships and to expand its current network of 446 stores. About 170 Fit Hub stores are to open this year and the share of own retailing in Reebok's sales should amplify from about 40 percent to 50 percent in the coming years. The more favorable mix should lead to meatier gross margins.
As for Taylormade Adidas Golf (TMAG), the group's plans to outperform the market are based on product innovation as well as the development of new categories in the industry and a more judicious channel mix. The golf company wants to raise its share in the metal woods and irons categories, and to expand in soft goods. Efforts to lift margins will include the opening of outlet stores.
It was announced at the meeting that Ben Sharpe, the Taylormade's chief executive since last June, has left the company for personal reasons. He was replaced in February by David Abeles, who rejoined the company as president of TMAG and Adams Golf. He was the chief executive of the Competitor Group for about a year but previously spent 12 years at TMAG. Further details on this company and the golf market will be provided in an upcoming issue of SGI Europe.
Robin Stalker, the company's chief financial officer, said that sales and earnings would increase in each of the five years until 2020, but he pointed out that the performance would not be linear –because the group has to be more agile in reacting to market changes and to allocate resources accordingly.
The initial reactions to the plan were mixed. Some of the investors appeared impressed by the shift to a consumer-driven approach and investments in shorter lead times to stimulate full-price sell-through. Others feared that the goals may be overly ambitious or did not discern sufficient change.
