Puma Plans 5-year ‘Attack’

More focused investments in emerging markets, an entirely revised supply chain and more distinct product ranges are part of a strategic overhaul launched by Puma to exploit a sales potential estimated at €4 billion by 2015, which would amount to incremental sales of about €1.5 million compared with last year.

Dubbed “Back on the Attack,” the five-year plan was outlined at an investor day Tuesday in the Puma head office in Herzogenaurach by Jochen Zeitz, the chief executive who has revived the brand in the last two decades. His presentation had many undertones of a cheerful farewell, since it was announced a few days earlier that Zeitz would quit his function as chief executive of Puma to be placed at the helm of a new Sports and Lifestyle division at PPR, the French luxury and retailing group that acquired the majority of Puma’s shares three years ago.

At the same time, Zeitz should become executive chairman of a new one-tier board at Puma, provided that the company’s shareholders approve a change of status into a Societas Europaea (SE) at their annual meeting in May. In the meantime Puma will be searching for another chief executive, and Zeitz will not leave until a replacement is found. He will have a second function as chief sustainability officer at PPR.

Back on the Attack is meant to launch another growth spurt for Puma after several tough years. This should be driven by a much sharper focus at all levels – with investments realigned to target 12 key markets, top retail accounts and core categories, as well as more regional ranges and marketing.

However, the plan should not entail any spectacular investments by Puma, and acquisitions should play only a minor part in Puma’s projected sales increase. This apparently disappointed investors since the price of Puma’s shares, which had risen sharply ahead of the meeting, slid by more than 3.5 percent in Frankfurt the following day. The gist of the criticism was that Puma had outlined many targets but few sufficiently concrete or original means to achieve them.

The financial targets associated with Back on the Attack are that net sales should rise at high single-digit rates each year. Based on the plan’s assumptions for the global market’s growth, this would entail snatching market share from competitors. Meanwhile, the company’s gross margin should remain stable, its SG&A expenses should decline as a percentage of sales and its operating margin should be among the highest in the industry.

In a remarkably candid assessment, Zeitz admitted that Puma had failed to reach all of the objectives it had set in its previous five-year plan, dubbed “Phase IV,” and that there was some skepticism in the market about its ability to rebound. However, he brushed this off with reminiscences of his early days at Puma, when bankers and investors rolled their eyes about the arrival of yet another chief executive at the ailing Puma – and only 30 years old, at that.

Part of the slowdown was attributed to increased competition in the sports lifestyle market, as rivals have moved in with cheaper products. This has caused price erosion and made such products much more widely available, reducing Puma’s exclusive aspect. At the same time, Puma has faced tougher competition from vertical retailers and private labels.

An internal problem described by Zeitz is that the company struggled to manage its own expansion, as it launched five product categories and moved into 10 new markets in the last five years, leading to the integration of fresh staff and operations. Zeitz added that the company had misjudged the pay-off horizon on some of the investments.

Perhaps even more telling was the admission that Puma may have drifted away from its consumers in the last years, and that it was no longer the hottest brand around. Then came the economic downturn, which prompted Puma to reduce investments in emerging markets at a time when they were starting to thrive.

However, while Puma’s performance suffered, the company began to revise its market approach, starting with structural changes. It eliminated layers of management to become leaner, while upgrading senior management positions.

Among the most substantial changes, Puma’s supply chain was overhauled to compete more efficiently with faster retailers. The company adopted distinct go-to-market processes for its functional products, its lifestyle ranges and the ranges aimed at its own stores, or close retail partners. Lead times were reduced by up to five months.

In adjusting the supply chain going forward, Puma wants to strengthen regional sourcing hubs in key emerging markets. This should enable Puma to react more quickly to market trends and sometimes to reduce its costs, particularly with regards to customs and anti-dumping duties.

Other shifts in sourcing are chiefly meant to offset rising production costs. Puma is moving production within China, from the Guangdong province to production hubs with lower standards of living, such as Hunan. At the same time, it is moving more production to countries such as Indonesia, Cambodia and Bangladesh.

The sharper approach underpinning Back on the Attack has led to a rethinking of the company’s product ranges as well. Puma reduced its number of products by about 20 percent in the last two years, but at the same time it wants to come up with more distinct products for particular markets and retailers.

To improve its regional offering, Puma has set up “development asteroids” in Herzogenaurach, London, Hong Kong, Tokyo, Boston and the southern hemisphere. To clarify the segmentation of its offering, it introduced a new labeling system this year, with orange for sport, red for sports lifestyle and black for sports fashion. And to make better use of this differentiated offering, Puma is investing in distinct sales forces for sports and lifestyle products, and for footwear and apparel and accessories.

As part of Back on the Attack, Puma has identified four core product categories that should make up about 80 percent of the brand’s sales growth worldwide in the next five years: team sports, running/fitness/training, motor sports and lifestyle. The remaining 20 percent of growth should come from regional categories, which Puma will deploy and adjust in markets where they are relevant. It particularly pointed to golf, outdoor, kids and the Black Label fashion range. Other smaller examples are cricket in India and a wilderness-inspired outdoor range to be launched in Africa.

In terms of product categories, about 40 percent of Puma’s expansion in the next five years is expected to be generated by footwear, compared with 35 percent for apparel and 25 percent for accessories. This would entail a little shift in Puma’s spread of sales per category, with the share of footwear contracting from 54 to 50 percent, while apparel would expand from 33 to 35 percent and accessories would inflate from 13 to 15 percent.

Puma has applied the same focus to review its distribution strategy. It has identified strategic accounts with which it wants to develop tighter and more vertical partnerships. The company expects that its wholesale business will account for about 80 percent of its sales in five years, compared with 84 percent this year. Meanwhile, the share of Puma’s retail business should reach 16 percent of its projected sales in 2015.

Yet again, the fastest growth should come from electronic sales. Puma expects that its own sales over the internet will make up 4 percent of its sales in 2015, which would amount to about €160 million, compared with a lower double-digit figure this year. However, including electronic sales by other parties, the company expects that e-commerce as a whole could end up making about 8 percent of sales. It appointed a seasoned head of e-commerce and relaunched its own website earlier this year, which has led to an increase in traffic for the first time in nearly three years.

On the marketing side, Puma still wants to be regarded as the most desirable sports lifestyle brand, and it has added the tag of most sustainable brand in the sector. However, the fresh offensive entails a rethinking of Puma’s brand identity, which has been redefined around the concept of “joy.” The brand would like to be seen as “the DJ, the brand that joyfully mixes the influences from sport and lifestyle with the desire to contribute to a better world.” The brand identity is neatly carried by Usain Bolt, the multiple-medal-winning sprinter, and the entire Jamaican athletics team.

As part of its new marketing strategy, dubbed Puma 2.0, the company has mapped out its consumer landscape and split its audience into three groups: the progressive athlete and stylish actives in sport; the “trendsters” (sic) and casual comfort in lifestyle; and the metro twist and modern motion in fashion. Complementary studies are to be carried out in the U.S. market and Japan, China and India, among others, which should help Puma to adjust its marketing to regional consumers.

Among its most inspiring efforts to reconnect with consumers is the concept of the Puma social club. This campaign focuses on the after-hours athlete, enjoying social games like darts and football, which combine activity and an urban social life. The company further indicated that it would shift its focus increasingly to digital communication. It will still invest in other media and in sports marketing, with a stronger emphasis on individual team sports players, which will lead to a small increase in marketing spend as a percentage of sales in the next years.

This strategy forms the framework for more specific plans in each region, which were outlined at the investor day by Stefano Caroti, Puma’s chief commercial officer. His plans call for a strong focus on six emerging markets, which are expected to generate 42 percent of Puma’s sales growth in the next five years, compared with 38 percent for its six leading mature markets. The six emerging markets would then lift their share of sales from 13 percent to 22 percent by 2015.

Probably the most spectacular investments are to take place in China. In this context, Zeitz blamed himself for not moving into the Chinese market with a fully owned operation a few years ago. Puma is now lagging far behind other companies in this country, whereas the entry barriers have become much higher.

To launch its catching-up drive, Puma said that it would take full control of Liberty China Holding, its joint venture with Swire Resources for China and Hong Kong. Puma already has a share of 51 percent in this joint venture. The acquisition of the 49 percent held by Swire will come at a cost in the double-digit-million range, and it will become effective in January.

Puma expects that China will account for about half of its growth in the Asia-Pacific region in the next five years – while its plans call for its sales to double in this territory. China would then become the third-largest market for Puma.

Caroti explained that the expansion would be based on a pull strategy, starting with an extensive face-lift for the 800 mono-brand Puma stores in China – only a small share of them owned and managed by Puma. The changes, to be completed by 2012, will entail a store design and fittings adjusted to the Chinese market, as well as an adjusted offering. Once Puma has upgraded its profile in China, it wants to find partners to open another 2,000 doors in the country by 2015.

Still, it is not China but India that is expected to become Puma’s fastest-growing market in the next five years. Growth there should be driven by mono-brand stores and investments in adapted ranges, from cricket to motor sports and lifestyle.

Puma has 30 own stores in India so far and intends to open more in the largest Indian towns, while it will team up with partners for second- and third-tier cities. India is also one of the prime examples of countries where Puma wants to expand its local sourcing organization to bring products to market more swiftly.

Another emerging market on Puma’s priority list is Russia, where the company has suffered many fits and starts in the last years. New managers were sent out to Russia earlier this year, headed by Miroslav Ryba, former general manager in the Czech Republic. Puma wants to expand there through a more regional offering, focusing on both performance and lifestyle products.

A fourth emerging market on the list is Brazil, where Puma has also upgraded its management team, enhanced its regional sourcing and opened own stores. The other two emerging markets where Puma will invest most strongly are Korea and Mexico.

When it comes to mature markets, Puma has decided to focus on the U.S., the U.K., France, Germany, Italy and Japan, where its situation has stabilized. Puma still sees substantial upside in the U.S. market through focus on fitness, apparel, golf and lifestyle. In this context, Puma unveiled the launch of a footwear range that is meant to capitalize on the toning trend.

In Western Europe, Puma wants to restore its position as the leading sports lifestyle brand, by focusing on quality distribution. It is finalizing strategic partnerships with two European retailers, one of them being Intersport. Separately, in inaugurating a new Spanish head office for the company, Javier Ortega, head of Puma’s new subsidiary in Spain, told Spanish reporters that it was targeting sales of €150 million in five years, after a difficult transition this year.

Overall, the Puma brand is expected to generate about 90 percent of the company’s budgeted sales increase, while the remaining 10 percent should come from other brands. Tretorn, the Scandinavian outdoor and lifestyle brand acquired by Puma in 2001, and Cobra Golf, which it bought earlier this year, should make up about 3 percent of the group’s sales this year – taking into account that Cobra Golf was only consolidated from April. However, the company’s head of global strategy, Franz Koch, estimates that the non-Puma business in the group should expand to 8 percent of the group’s sales, amounting to about €320 million.

The plan calls for Tretorn’s sales to triple in five years, after it was restructured last year and hired a seasoned chief executive, Ulf Gustafsson, earlier this year. Tretorn’s sales have increased in the triple digits so far this year, and Puma wants to capitalize further on its mix of outdoor and lifestyle appeal. It is enjoying strong growth with rubber boots, which are fashionable in Scandinavia, and it has launched a small category with hybrid sneakers.

Cobra Puma Golf, the joint operation of Cobra golf equipment and Puma’s golf apparel and footwear, has gotten off to a strong start as well. The tie-up with Cobra gave Puma access to hundreds of new accounts, generating double-digit expansion in orders of Puma Golf products. Furthermore, the group expects Cobra Puma Golf to deliver industry-leading Ebit margins.

The growth expected from non-Puma brands only includes a share for acquisitions. The takeover targets could be complementary assets to boost existing Puma categories, as in the case of Cobra Golf, or they could cover categories that may not fit the Puma brand. Zeitz pointed out that, given its cash position, Puma could easily finance acquisitions in the two to three-digit million range.

In any case, such buys should differ entirely from the acquisitions to be made by PPR, which owns 71.6 percent of Puma, for its new sports and lifestyle division. François-Henri Pinault, PPR’s chairman, said that Puma would be at the core of this division. Acquisition targets should be complementary to the Puma brand, most probably operating in the footwear, apparel and accessories business, to obtain more sourcing synergies with Puma. Referring to his strategy in the luxury business, which is built around the Gucci brand, Pinault further explained that PPR may buy rival sports brands focusing on different price levels. On the other hand, Pinault declined to comment on persistent rumors that Puma is holding talks for the acquisition of Jack Wolfskin, the leading brand of outdoor gear in Germany.

Pinault said that the sports and lifestyle division should become larger than the Gucci Group, which reached sales of nearly €3.4 billion last year. However, he was at pains to downplay the amount of cash available for this expansion. It should be financed partly from the proceeds of the sale of PPR’s retail units, Conforama, Fnac and Redcats, which PPR has been trying to sell for a while, but he insisted that not all of the proceeds would be used for acquisitions in sports and lifestyle.

The new division would create a conglomerate similar to those that have been formed lately around Nike, Adidas, Amer Sports or Jarden Corporation. For PPR, it would constitute its second pillar, next to luxury – with a wider target audience and therefore more revenues, although probably with a lower profit margin as well.

While leading this unit at PPR, Zeitz should continue to supervise Puma and Back on the Attack as executive chairman of the Puma board. However, he appeared relieved to hand over the implementation of the plan itself to another chief executive. As he quipped, he had been at the helm for 18 years – and when their children reached that age, parents should learn to let them go. However, analysts were unimpressed that an as-yet-unknown chief executive would have to implement the plan.

With regard to the change of status at Puma, Pinault said that it was meant to reinforce its management and to make it more flexible. Overall, the SE status, which has been permitted for companies in the European Union since 2004, is meant to simplify the chain of command and to make use of cross-border company laws. Zeitz added that capital markets were favoring the SE status, but stressed that Puma had no intention of moving away from its German heritage.

It remains unclear exactly how Puma’s new board will be structured, although the rules dictate that it should consist mostly of non-executive directors. Pinault, who is currently chairman of Puma’s supervisory board, will be a member of the board, probably along with other representatives of PPR and of Puma’s staff. On the other hand, the new CEO is unlikely to have a seat on Puma’s future board.