Since taking over as Adidas chief executive last October, Kasper Rorsted has quickly won investors’ approval. Especially early last month, when the 55-year old Dane raised the company’s medium-term goals, the markets responded enthusiastically. The share price leaped 10 percent within minutes of the announcement. The centerpiece of Mr. Rorsted’s plans was a massive increase in online revenue, raising Adidas’s 2020 target from €2 billion to €4 billion, around $4.27 billion.
But many sports retailers see Mr. Rorsted’s investor-friendly plans as a declaration of war. “It’s a slap in the face for people who, over decades, have made Adidas what it is today,” said one leading manager of an international sports retail chain, who preferred to remain anonymous. Others are speaking out openly. “This means more competition for us,” Markus Rech, head of the Munich-based sports retailer Sport Scheck, said bluntly.
In private, many German retailers are already bitter toward what is by far their most important supplier. They are particularly angry about the steep discounts Adidas offers in its online stores, and complain about delays in delivery that leave yawning gaps on their shelves while the same items can be purchased easily on Adidas’s own websites.
“Adidas only thinks in selfish terms.”
This selective distribution is a sore point for retailers. The Bavaria-based sportswear giant, a rival to U.S. hegemon Nike and smaller peers Under Armour and Puma, chooses exactly which stores can stock which products. So specialist sports stores no longer get to sell fashionable sneakers, cutting them off from a crucial segment of the youth market. “They only think in selfish terms,” one store owner said off the record. Even Nike was now more reliable than Adidas, he added. In the past, the American company had itself drawn criticism for its supply policies.
Mr. Rorsted seems untroubled by retailers’ concerns. “We have to be where consumers are buying,” he said, adding that the Adidas website was the company’s most important retail outlet. Last year, the company’s e-commerce revenues shot up 59 percent, to around €1 billion. “It’s all about direct contact with the customer,” Mr. Rorsted said. Above all, Adidas is looking to sell directly to young consumers, cutting out middlemen in order to achieve substantially higher margins by 2020. It was one of his promises to investors he made last month.
For years, Adidas has lagged its main rival Nike in terms of profitability. The German sport shoe maker expects its operating profit margin should rise to 11 percent from 7.7 percent in 2016. That’s still well below Nike’s 13.9 percent. At the same time, Adidas also faces growing competition in the United States from a relatively new American sports brand, Under Armour, which has $4 billion in annual sales and is selling in Europe as well.
Despite the competition, Mr. Rorsted is well aware of his company’s strength. The Adidas brand is more popular than ever in its 60-year history and the CEO has made it a priority to grow in the United States. Revenue grew by 20 percent last year, with profits up 40 percent. By contrast, German sports retailers saw income stagnate in 2016, with many barely breaking even. In America, the world’s largest market for sporting goods, a number of chains have already gone bankrupt. “Our negotiating position is very limited these days,” said Mr. Rech, the SportScheck CEO.
The power balance has long been tipping in Adidas’s favor. The company understands how modern retail works, and is constantly expanding its own network. Worldwide, the company already has 2,800 retail outlets of its own, including 50 online stores, along with 900 factory outlets offering heavy discounts. Adidas dwarfs any retail chain. Last year, its revenues came close to €20 billion. Intersport, Germany’s largest grouping of independent sports retailers, had a turnover of just €2.9 billion, including value-added tax.
Industry experts back Mr. Rorsted’s uncompromising strategy. “He has to forge ahead with online business. Ultimately, Adidas can’t expect others to do it for them,” said Philipp Prechtl, a senior manager at retail consultants Dr. Wieselhuber & Partner. Many well-known sports retailers have weak internet presence, added Mr. Prechtl, former head of marketing with Jack Wolfskin, a German maker of outdoor clothing and shoes. “It is in Adidas’s interest to have a presence in all retail channels,” he said.
Sports retailers do have some leverage, above all by turning to other suppliers. Although Adidas cannot be completely replaced, rivals such as Puma are striving to build good relations with retailers. “There are good alternatives,” said one business owner.
At the beginning of this decade, Puma moved sharply toward the lifestyle market. Under Björn Gulden, who took over as CEO in 2013, the company has brought out new football and running collections, bringing the brand back into sports stores. Mr. Gulden’s relations with retailers are markedly warmer than Mr. Rorsted’s. Smaller brands, like Jako and Erima, have used a strong service ethic to win over retailers.
Alternative brands are securing a higher profile in sporting goods outlets, including the retailers’ own labels. Brands such as McKinley, from Intersport, and High Colorado, from retail network Sport 2000, compete on price and are popular with consumers. “Customers are looking for value alternatives,” said Mr. Rech.
Other market players also pose a threat to Adidas. The American V.F. Corp. owns a diverse portfolio of sportswear brands, including The North Face, Timberland and Vans. It may be smaller than Adidas, with revenues of around €11 billion last year, but its margins far outperform its giant rival. In Europe, the Finnish group Amer Sports has a similar brand-portfolio strategy, enjoying particular success with its outdoor gear line Salomon. Its other brands include Atomic and Arc’teryx. “If it’s well-managed that model can really work,” Mr. Prechtl said. Like Adidas, these multi-brand groups have a powerful influence on retailers. Amer, for example, is Intersport’s third-largest supplier.
Both V.F. Corp and Amer have a track record of regular new acquisitions. “We always have our eyes and ears open,” Heikki Takala, Amer’s chief executive, told Handelsblatt. V.F.’s last substantial acquisition came in 2011, when it took over Timberland, the outdoor wear specialist. “We are still looking,” Karl Heinz Salzburger, V.F.’s head of international business, told Handelsblatt. Persistent rumors suggest his company may attempt to acquire Reebok, a brand Adidas is said to be keen to dispose of.
Despite Adidas’ new online focus, it is making moves to preserve goodwill with retailers. It recently set up a partner program for sports stores, which links retailers’ websites to Adidas’s own online portal, and sports firm will pay retailers a commission if the consumer buys an Adidas product. Sport Scheck is said to be keen to take part. Mr. Prechtl said he suspected Adidas would come to a compromise. “I do think the retailers will be given something,” he observed.
Adidas may be flavor of the month right now, but that might not last. “Every wave comes to an end,” said one retailer. The wheel of fashion will turn, Adidas will lose out, and the company will need strong retailers again, he added. That may be the case. But retailers must first survive an increasingly punishing environment.
Joachim Hofer covers the sports, leisure and IT sectors for Handelsblatt. To contact the author: firstname.lastname@example.org