About two years after the launch of Creating the New, the Adidas Group has raised targets for its five-year expansion plan, to reach sales of between €25 billion and €27 billion by 2020, with an operating margin of 11 percent for the Adidas and Reebok brands.
The upgraded targets were outlined in Herzogenaurach last week by Kasper Rorsted, who switched from Henkel to take over as chief executive of the Adidas Group last October. They call for sales to increase at an annual rate of between 10 and 12 percent in constant currencies and net income to grow faster, at an average annual rate of 20 to 22 percent.
The company previously aimed for sales of about €22 billion by 2020, with an implied operating margin of nearly 10 percent and net income to expand at an average rate of 15 percent over the five years. These targets were included in Creating the New, a strategic plan that has led to a turnaround for Adidas in the last two years.
Discussed as part of the presentation of the Adidas Group's buoyant results for 2016 last Wednesday, the upgrade triggered a sharp rise in the price of Adidas shares, which have been outperforming Nike and Under Armour in the last year.
Rorsted had been widely predicted to put emphasis on opportunities to raise the operating margin at the Adidas Group, which lags significantly behind Nike. But the Danish chief executive was also bullish about the group's potential to expand faster with online sales and in the North American market, among other areas. The Adidas group had set in motion additional plans to accelerate sales growth, while making the company more efficient, he said.
Among the measures to streamline the business, Rorsted said that it intends to divest CCM Hockey, which it bought as part of the Reebok acquisition. It already offloaded Rockport and decided last year to sell its golf equipment business, consisting of the TaylorMade and Adams Golf brands, as well as the Ashworth brand of golf apparel. The group said that it was holding talks about the sale of these golf businesses with several parties outside of the industry. Adidas Golf is to be integrated with other operations of the Adidas brand, and the Five Ten outdoor brand will be integrated with Adidas Outdoor.
As for Reebok, Rorsted reiterated that the brand's current performance was unsatisfactory and that it would have to improve through the reorganization outlined last year – entailing a move of the head office to Boston, 150 job losses and cutbacks in U.S. retail distribution. Rorsted emphasized that Reebok was growing outside of North America but that it was loss-making and it would have to make a contribution going forward.
Clad in jeans and an Adidas jumper, the Danish CEO cut a relaxed and level-headed figure. The superlatives favored by Herbert Hainer, the group's chief executive for more than 15 years, made way for an analysis of the group's strengths and weaknesses. Rorsted acknowledged that Creating the New was working and he opted to stick with the plan, but repeatedly said that there was plenty of work ahead to improve profit margins and that the group could not afford to be complacent.
North America has been targeted for over-proportional investment since the launch of Creating the New, and Rorsted said that this would continue. He refused to be pinned to a target on market share but made it clear the current status was unacceptable, despite a sharp rise last year. According to the esecutive, the operating margin for the Adidas and Reebok brands in North America is under-par as well, reaching just 6.3 percent in 2016 despite an improvement of 3.8 percentage points.
For a start, Rorsted's plan calls for growth at a double-digit rate in constant currencies for the Adidas and Reebok brands in North America this year, with extra focus on operational efficiency. The same projection applies for sales growth in Western Europe, which has already delivered remarkable results for the two brands in the last two years, mostly through harmonization across the region. Greater China is projected to deliver double-digit sales growth as well, with a focus on footwear to complement the Adidas brand's strength in apparel, and with expansion in brand-led retailing.
The strategy calls for balanced growth between functional and lifestyle products. The split currently stands at nearly 70 percent for performance and a little over 30 percent for lifestyle, but Rorsted insisted that the distinction is becoming increasingly irrelevant. He said that consumers use functional footwear for casual wear, and sometimes the other way around. He even tricked a reporter into wrongly identifying a functional shoe as a fashion product and viceversa.
The new targets include a sharp rise in sales through the online stores of the Adidas and Reebok brands to about €4 billion by 2020, compared with about €1 billion in 2016 and a previously set target of €2 billion for 2020. Rorsted intends to invest in online platforms as well as in digital technology to build relationships with consumers and to make the supply chain more efficient. Prior to Henkel, Rorsted's track record includes several assignments with technology companies.
Another part of Creating the New called for the group to sharpen its focus on six cities, from New York to Los Angeles, London, Paris, Shanghai and Tokyo. In fact, Adidas raised its sales by 30 percent in these cities last year, leading the company to claim market share gains in all of them. It is now aiming to double its turnover in the focus cities by 2020, compared with the level of 2015.
The Dane's rigorous approach is also leading to a strong emphasis on measures to harmonize and simplify business processes at Adidas. This involves a further reduction in the number of items on offer and harmonized marketing activities. He said the measures were meant to significantly improve the group's operational efficiency.
All of this ties in with the Adidas Group's strategy to speed up its supply chain. The Speedfactory in Ansbach is starting production this year and another one will open in Atlanta. The group said about 15 percent of its sales in 2016 were generated by products manufactured on Speed programs, but it wants the share to reach at least 50 percent by 2020. The rate of full-price sales obtained with these products is targeted to be 20 percent higher than the regular range, meaning it should help to lift the profit margins.
Beyond the results and targets, Rorsted made a point of outlining his views on management at the Adidas Group, pointing to a clear vision in terms of leadership. He wants to further stimulate the development of talented managers, and particularly women. Rorsted found it unacceptable that only 17 percent of the group's top 300 managers are women. He added that the share reached about 33 percent at Henkel but that it had taken time to get there.
Rorsted has set up a group of 18 leaders across the most important geographies and functions, and an expanded leadership team is to be established in the first quarter. Long-term remuneration for senior executives is to be linked to the development of the Adidas share price. Further details will emerge at a meeting with investors today. We plan to cover it in our next issue.
