As labor costs are seen rising at a compound annual rate of 13 to 15 percent, and material costs by between one and four percent a year through 2020, the Adidas Group has told investors that it is rearranging its sourcing strategy, while adjusting its product mix and planning significant price increases in some markets and higher sales efforts in high-margin markets as of next year.
In the immediate future, with its 2016 sourcing already hedged, the gross margin is expected to decline by between 0.5 and one percentage point next year because of these cost pressures and the strong dollar. Unlike its competitors in the U.S., Adidas is facing the added problem that it pays for the products it sources in Asia in dollars, but a relatively small percentage of them are sold in the U.S.
The company will offset the lower gross margins with cuts in some operating expenses in order to yield a stable operating profit margin on sales, which are projected to rise at a high single-digit rate. The Big a plans to keep its marketing spend at between 13 and 14 percent of sales, however, with an ongoing emphasis on the U.S. market.
On the sourcing side, the measures planned by the group include better management of materials usage, moving production to lower-cost countries, improved forecasting to increase the efficiency of partner factories and more automation. The company will also try to adjust trading terms with its suppliers and give them incentives to invest in laser cutting and other automated functions by specializing them on fewer items.
These and other sourcing strategies were outlined and discussed at length at the third Manufacturing Forum organized by the World Federation of the Sporting Goods Industry in Hong Kong earlier this month, which we attended as one of its media partners. We shall report the highlights of this very interesting convention in the coming issues of our newsletter.
While stressing that its manufacturing partners already have geographically balanced capacities, Adidas indicated that it is focusing on generating higher efficiencies to elevate their production levels and reduce their costs. On the other hand, the migration to lower-cost countries will continue, in particular to new territories such as Myanmar.
The proportion of shoes made in China is projected to drop from 23 to 15 percent of the total volume. Vietnam will remain in the lead with about 40 percent of the volume, but Indonesia's share is set to grow from 23 to 27 percent. Currently, the group pays about $4.5 billion a year to purchase about 300 million pairs of shoes, or around $15 per pair.
The group is also spending around $3.0 billion to source 350 million units of apparel, or $8.57 per unit. Out of them, 33 percent are made in China, but the country's contribution is set to decline to 17 percent. Vietnam will grow from 13 to 21 percent, Indonesia from 8 to 13 percent, and Cambodia from 16 to 29 percent. Adidas is also looking at sourcing opportunities for clothing in the Philippines, Bangladesh and Pakistan.
Overall, about 30 percent of all the products sourced by the group come from China right now. In a separate statement, Adidas stressed that the production levels in China will not decline in the future because of higher planned sales volumes overall. The company said that the volume of products sourced in China will remain stable as it is committed to sourcing and delivering more sophisticated products to consumers in this important and dynamic market.
Meanwhile, as previously reported, Adidas is also contemplating greater use of automation to bring the production of some products closer to the consumer. It is setting up a first, pilot “Speedfactory” in association with Oechsler at Ansbach in Germany that will churn out the first 500 pairs of running shoes with a unique design in the first half of 2016, to be followed by high-volume production in large urban areas in the near future. Making use of intelligent robotic technology, the project will allow for automated, decentralized and flexible manufacturing. It will also reduce the impact on the environment through a drastic cut in the use of adhesives and shorter distances covered in the transportation process.
