While unveiling its latest five-year strategic plan at an investor day three weeks ago, the Adidas Group implicitly admitted that it could not catch up with its bigger American rival in the next few years – but the plan and the new management that will implement it could infuse the German company with some of the focus and marketing zest that have reinforced the Nike group's global leadership in recent years.
As we reported in our last issue, the “Creating the new” program sets a sales target of about €22 billion for the Adidas Group in 2020 assuming constant currencies. This compares with sales of nearly $27.8 billion for the Nike group in its last full fiscal year, until the end of May 2014, and the U.S. group's turnover for the first three quarters of the current fiscal year jumped by 12 percent. This implies that, in order for Adidas to catch up, Nike would have to suffer a sales decline or very adverse currency exchange rates in the coming years.
The figures show that the gap has widened between the two groups in the last five years. The turnover of the Adidas group increased by 21.2 percent from 2010 to 2014. Over the comparable period for the Nike group, its turnover soared by 46.2 percent in the five fiscal years until the end of May 2014. Over these same periods, the turnover of the Adidas brand was up by 35.1 percent, while sales for the Nike brand alone jumped by 58.2 percent (slightly aided by the fact that Nike Golf and the Hurley brand were bundled with Nike brand sales from the last full fiscal year).
The difference has mostly come from North America, where the Nike brand's sales rocketed by 83.7 percent over the five-year period. The regional breakdown is not available by brand for the Adidas group, but independent information on U.S. market shares clearly show the German brand's inability to gain share sustainably in that market.
Adidas managers have repeatedly made it a priority to get more traction in the U.S.. It was one of the stated objectives of Herbert Hainer when he formally became chief executive in 2001 to raise the group's U.S. market share from 11 to 20 percent in three years. When that failed, the Adidas group pumped up its U.S. market share with the acquisition of Reebok. North America was again a priority in the Route 2015 strategic plan mapped out by the company for the five years until 2015. But far from raising its share, Adidas saw Under Armour become the second-largest player in the U.S. sports apparel market last year.
Kevin Plank, the chief executive of Under Armour, was not exactly tactful when he suggested in a recent interview with Bloomberg Television that Adidas was its “dumbest competitor.” But others have openly reproached Adidas for not getting some of the basics right in the U.S. market. Investors particularly lambasted the uninspiring presentation of Adidas products in U.S. stores: One of them was left wondering at the investor day in Herzogenaurach if Adidas executives ever went into the stores that sell their products, stating that “the fundamental disregard for customer engagement in the U.S. is nothing short of shocking.”
Mark King, the Adidas Group's president for North America since June, has so far responded by pointing to all of the initiatives launched by the group in the last few months – from brand campaigns to extra budgets for athletes and reinforced partnerships with retailers. Yet the company admitted that it also had to invest in some basics, such as training for the U.S. sales force.
Perhaps just as importantly, King likes to point out that everything is “different” under his tenure, starting with him. Adidas has moved scores of global managers to Portland, and King himself regularly travels to the group's head office in Herzogenaurach, to make sure that the U.S. is fully integrated into the global strategy. Since the group has tried almost everything else, these cultural changes may well be the key to Adidas' situation in the U.S. market.
Then again, analysts disagreed about the importance of the U.S. market for the Adidas group. The company itself points out that the U.S. remains the largest and most influential sports market in the world – and that the upside is large. Others contend that Adidas may be better off focusing on markets where its brand equity is stronger and the margins more interesting.
As the Adidas group itself points out, its own strength lies in emerging markets. While Russia is temporarily a trouble spot, the company has courageously built up its market leadership in the country through large-scale investments in retailing, and it could pay off again in the years to come if the political situation stabilizes. The company also has momentum in China.
Some analysts were more concerned about the situation in Europe. The regional numbers for Adidas and Nike are not directly comparable because Western Europe at the Adidas group includes many East European markets that belong to Nike's Central & Eastern Europe region, and the numbers for the Adidas group include other brands (albeit not very significantly for this region). Still, the figures clearly indicate that Nike has moved ahead in Europe.
The Nike brand alone chalked up sales of $4,979 million in Western Europe for the fiscal year until the end of May 2014, compared with €4,112 million for the Adidas group in 2014. Taking more directly comparable periods, the €4,112 million for the entire Adidas group in Western Europe in 2014 should be set against $5,630 million for the Nike brand alone in the four quarters until the end of November 2014 (and again, the Adidas group number for the region includes many more countries).
Some of the latest independent market share figures, for the month of January at retail level against the same month in 2014, show that Adidas is gaining in running in Germany, and both Nike and Adidas are growing their shares for running products in France. Nike raised its market share for football in Germany, but lost some in France, where Adidas' share remained stable. The market shares of the two major contenders were roughly stable in Italy.
Gil Steyaert, who heads up the Adidas Group in Western Europe, pledged at the investor day that Adidas would regain the lead on its home turf. As reported in our previous issue, the prerequisite for the new strategy was the formation of a single organization for Europe. The approach advocated by Steyaert also draws some inspiration from “Creating the New,” for example with its emphasis on influential cities (London, Paris, Barcelona, Berlin and Milan) or the planned increase in the share of direct retail sales to about 30 percent of European turnover for the Adidas and Reebok brands, against the current level of about 20 percent.
However, the new European strategy is equally reminiscent of the “category offense” process that enabled Nike to inflate its market share in North America and to pull ahead in Europe. Adidas said that the market had changed as its rivals became more aggressive in Europe, implicitly acknowledging that Adidas may have been complacent in recent years. Steyaert repeatedly pointed to a crucial cultural shift as Adidas has acquired more “focus” and an “obsession” with consumers.
The latest figures indicate that the approach is working out for Adidas. The group's Western European sales advanced by 13 percent in constant currencies for the last quarter of 2014, with increases of 15 percent for Adidas and 18 percent for Reebok. Steyaert reported sharp rises in sell-through at some European key accounts in the last weeks. The group says that the European sales numbers for the first quarter of this year, which will be released on May 5, have been showing continued momentum.
Analysts appeared neither greatly disappointed nor overly enthused by the new strategic plan presented by the group, but the drive displayed by the management and the early results of strategic adjustments have apparently supported the recent upward trend in Adidas' share price. It shrank by nearly 38 percent last year with a vertiginous drop at the end of July, when the group admitted that it could not reach the target of its former Route 2015 plan. But the share price has been rising almost steadily by more than 30 percent since the start of this year: It started to recover as last year's troubles appeared to have been at least partly digested - and it continued to move up after the investor day.
The Adidas group's ambition to regain European leadership could come at a substantial cost, since competition is heating up in Europe on various fronts. Puma has stepped up its efforts to regain ground in Europe, and Under Armour is making its presence felt more strongly – with one source indicating that the American brand is aggressively buying shelf space in Europe.
Furthermore, the high price paid by Adidas for its deal with Manchester United has raised the stakes for sports marketing investments. This comes just at a time when the German football federation (DFB) is preparing for a round of negotiations for its sponsorship, even though that contract will only run out after the 2018 World Cup. Adidas was able to beat a larger offer from Nike in 2006. Could the DFB afford to let this happen again?
