The Adidas Group has shifted gears in the first full year under the leadership of Kasper Rorsted, to amplify and accelerate the five-year strategic plan launched three years ago. The group's management team and brand assets were both rejigged, while the company implemented more centralization, tackled losses at Reebok and invested more in digital resources and in North America.
Adidas group managers said at a press conference in Herzogenaurach on March 14 that it had made particular progress with the Reebok brand. As outlined above, the brand continued to lose ground in the U.S. market, partly due to store closures. However, this decision had a clear impact in terms of profitability, as the Reebok brand achieved its highest gross margin since its takeover by the Adidas group. Harm Ohlmeyer, chief financial officer, indicated that Reebok had ceased to make large-scale losses, and that it was no longer guzzling Adidas cash.
Under the program, Reebok moved out of its former head office in Canton and into the seaport area of Boston. It continued to close down under-performing U.S. stores and cut out marketing activities that did not have the strongest impact. The number of models was reduced, while operations were simplified.
But Kasper Rorsted, chief executive of the Adidas Group, pointed out that the company continued to over-invest in the Reebok brand to get it back on track. Among the strategic adjustments that are meant to drive sales as well as profits, Reebok fully adopted design-to-value principles and it rolled out a value-based pricing model. Reebok was encouraged to take inspiration from the franchise management model at Adidas. The absolute and relative marketing working budget was raised but the spending focused on fewer and more efficient concepts, using a new influencer marketing model.
Rorsted reiterated that the turnaround plan was intended to take three to four years. The board is directly involved on a quarterly basis. Roland Auschel, the board member in charge of global sales, and his counterpart in charge of global brands, Eric Liedtke, go through the progress on a monthly basis, and the Reebok team checks the implementation of the six focus areas at weekly Wednesday meetings.
Rorsted said at the conference that Reebok should become profitable before 2020. There are still some stores to be closed in the first quarter, which should lead to a single-digit sales decline for the brand in North America in the three months, but Reebok is expected to return to growth in the region in 2018.
Due to the group-wide focus on a faster business model, which was part of Creating the New, speed-enabled products have grown to represent about 28 percent of its sales. Apart from the almost entirely automated speed factories that Adidas has been setting up in Ansbach and Atlanta, speed production lines have been implemented with manufacturing partners. The second focus on cities has led the Adidas group to gain market share in these targeted areas, the company's managers said.
As for the strategy to multiply partnerships, Rorsted said that it sold around one million pairs of shoes made from ocean plastic last year, on the back of its partnership with Parley for the Oceans. The group extended a partnership with Carbon, which should lead to the sale of about 100,000 3D printed shoes this year. Liedtke joined Carbon's board earlier this year.
Footwear has been in focus at the Adidas group in recent years because it allows for more differentiation and creates more brand loyalty, but Rorsted said that it was moving to address the slower growth in apparel. It will concentrate on the development of its franchises in apparel, adjustments in the pricing structure and the use of different materials.
Another focus for investment is infrastructures, as the shortage of warehouse space caused bottlenecks in the second half. The company has enlarged a distribution center in Rieste, near Osnabrück in Germany, where it constructed a new building dedicated to online sales, meaning that it's equipped to deal with large number of smaller packages. Another warehouse dedicated to e-commerce will be opened in the U.K., partly to deal with the impact of Brexit. Two more facilities should open in the north east of the U.S. and on the west coast, primarily to support online sales. Other investments relate to the head offices in Herzogenaurach, as well as offices in Shanghai and in Portland, where Adidas will more than double the size of its campus, as reported by The Oregonian last week. One new building on the German campus will accommodate 2,000 employees and the company is adding a conference center building that will have an extra employee restaurant, garage and kindergarten.
The Adidas group predicts that its sales will increase by about 10 percent in constant currencies this year, while its net income from continuing operations will move up by 13 percent to 17 percent. Sales growth should include double-digit growth in North America and the new Asia-Pacific region, as well as in e-commerce, on the back of continued investments.
For the longer term, the company has upheld its guidance of a sales rise of 10 percent to 12 percent in constant currencies on average from 2015 until 2020, but it has slightly upgraded its target for operating profit margin, raising it from 11.0 percent to up to 11.5 percent for 2020. It has also upgraded its forecast of net income from ongoing operations to an average range of 22 percent to 24 percent per year over the five-year period, compared with the previous range of 20 percent to 22 percent.
After the Adidas group's share price more than doubled in the two years up to last September, it lost more than 10 percent in the six months up to March. This probably encouraged the company to launch a multi-year share buyback program of up to €3 billion, starting on March 22 and lasting until May 11, 2021. This amounts to about 8 percent of the current market capitalization. The vast majority of the program is to be financed by the company's net cash position, as a means to use that efficiently in the absence of any immediate takeover plans. The group said the buyback complements its annual dividend in the range of 30 percent to 50 percent of net income, and it intends to cancel the vast majority of the repurchased shares.
