Adidas Woes

Three Stripes and You're Out

adidas2 losing traction
Stuck in the mud?
  • Why it matters

    Why it matters

    If Adidas cannot stem losses, fix mistakes and find new markets, it will lose profit and cede more market share to rival Nike.

  • Facts

    Facts

    • Adidas’ chief executive Herbert Hainer is the longest-serving DAX company CEO.
    • Nike generated $27.8 billion in revenue in its 2014 fiscal year, making it the biggest sportswear maker worldwide
    • In 2015 the global sports apparel industry is expected to be worth more than $126 billion.
  • Audio

    Audio

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It was a night that Herbert Hainer, the chief executive of Adidas, the world’s No. 2 sport shoe maker, will never forget.

Neither will millions of Germans. A summer evening, July 13, 2014.

In a dash toward the goal, Mario Götze, the baby-faced German forward, artfully deflects a long lob from the corner in the 113th minute with his chest, finessing it perfectly to his airborne left foot. Goal.

The balletic score devastates the Argentinians. Germany goes on to win the World Cup 1-0.

The chief executive of Adidas doesn’t absorb the moment like most Germans do, in front of a television screen. He’s in the stadium in Rio de Janeiro.

For Adidas, based in the tiny northern Bavarian town of Herzogenaurach, the German soccer victory is a godsend.

As the country’s national players and their trainer, Joachim Löw, hoist the gold victory cup above their heads to the cheering throngs, the Adidas machine kicks into action.

Out spew German national team jerseys embossed with four golden stars, the mark of the champion.

Mr. Hainer, in the midst of the euphoria, takes selfies in Brazil’s Maracana stadium.

The victory is a personal one for Mr. Hainer, who once scored goals for FC Dingolfing, a semi-pro team in a Munich suburb.

Behind his desk in Herzogenaurach, a photo of the German national team radiates the glory of last year’s cup victory.

Adidas’s partnership with the German Soccer Association, the DFB, turned that triumph into gold.

In just the few months after the World Cup victory, Adidas generated more than €2 billion, or $2.26 billion, from the sale of soccer shoes, jerseys and other fan memorabilia, a record. Through 2014, Adidas sold more than 3 million German national team jerseys bearing Adidas’ famous three-stripe logo. That too was a record, breaking even the sales mark set after the 2006 World Cup, when Germany hosted the event.

But the elation at Adidas faded quickly in the after-glow.

The extra revenue generated by the sales of soccer shirts, shoes and other memorabilia were not enough to offset gaping holes in other parts of Adidas’ business.

Just two weeks after Germany’s World Cup victory last summer, Mr. Hainer had another day he would not soon forget. It was the day he had to revise lower the company’s mid-term and annual sales goals.

The Adidas share price plunged 16 percent on the bad news on July 31. It was the second time in less than two months that Mr. Hainer, the longest-serving chief executive of a German DAX company, had to correct his own forecasts.

Investors were shocked. Mr. Hainer was only promising €650 million in profit, after earlier predicting earnings of €830 million to €930 million.

Sales would rise by only a middle single-digit percentage in 2014, Mr. Hainer warned, down from the upper single-digit growth he had held out a few months earlier.

The goals he had set out in his “Route 2015’’ plan to revive profitability at Adidas would, unfortunately, not be met after all, he said.

When that might now happen, the Adidas chief executive would not say.

Back in the day, Mr. Hainer had once set his sights on annual sales of €17 billion by the end of this year and an operating profit of 11 percent of sales.

In 2014, sales barely reached €15 billion, and the operating margin through the first nine months – the latest figures reported by the company – was 8.3 percent.

Those four golden stars on Germany’s national team jerseys still shine brightly, but the luster has faded at Adidas, and with it, the reputation of Mr. Hainer.

Adidas shares lost more than 30 percent of their value last year, the most of any DAX company.

Will Adidas and Mr. Hainer pull out of their nosedive?

Or is the German company already quietly planning a transition, a life after Mr. Hainer?

The company’s up-and-coming managers are already in place, especially Eric Liedtke, a 48-year-old American who is developing Adidas’s long-term “Strategy 2020.’’

Every now and then, rumors spread that Adidas’ non-executive supervisory board, which hires and fires the chief executive, is searching for a new leader outside of Adidas.

The rumors claim that hedge fund investors in the firm are pushing for a change at the top. A top German head hunting firm, Egon Zehnder, is supposedly already on the case.

The headhunter declined to comment.

From the top levels of Adidas, the official line is: “Nothing has changed since March 2014, when we announced we were extending Mr. Hainer’s contract.’’

At that time, despite the flagging performance, the company’s overseers gave Mr. Hainer another contract through 2017.

Since then, the Adidas chief has been as upbeat and ready to rumble as ever.

But behind the game face, Mr. Hainer, who has been chief executive since 2001, is battling for Adidas and his own reputation.

In Herzogenaurach, which is also the home to another global shoe maker, Puma, the locals are now comparing Mr. Hainer to Jochen Zeitz, the legendary ex-chief executive of Puma.

Mr. Zeitz took over Puma when he was just 30 and brought the shoemaker to new heights. But he failed to make a transition when the time was right and ended up leaving on a down note.

“Mr. Hainer could have stepped down last year with his dignity intact,’’ said one local who declined to be identified. Instead, the Adidas chief and his employees will now learn what it’s like to have the shoe on the wrong foot, so to speak.

“They are not used to having to prove themselves each day,’’ the industry insider said.

The pressure on Adidas’ workforce has increased immensely.

Within the company, a battle is raging between an old guard that defends the brand and those who feel it has become old, out-dated and unfashionable.

The comedown at Adidas is a tragedy in five parts, a passion play of bad decisions, strong competitors, wrong branding and a portion of bad luck.

 

Lesson 1: Nothing is Possible Without America

The battle for the global shoe market begins and ends in America. Whoever prevails there is the global leader.

Adidas is No. 1 in China, way ahead of archrival Nike in South Korea and Japan, Russia and strong in South America.

But that doesn’t really matter much for the German shoemaker.

The real money in the global shoe business is made between New York and Los Angeles.

“The battle in the sports apparel and shoe business is in the United States because the American trends set the pace for the tastes in foreign markets, especially Asia,’’ said Klaus Jost, the former chief executive of German sporting goods retailer Intersport.

And in the United States, Nike is dominant.

The global market leader from Beaverton, Oregon, is significantly bigger than Adidas in almost every respect. The American company is also growing faster and has sustained a higher level of profit for much longer than Adidas.

In the last quarter, in just three months, Nike earned €577 million – only €70 million less than Adidas earned during the entire year.

“Adidas just hasn’t been able to emerge from Nike’s shadow in the United States,’’ said one top industry adviser, who declined to be named.

Adidas placing its U.S. headquarters in nearby Portland, Oregon has not helped. “That would be like Toyota moving its German headquarters to Wolfsburg,’’ the global headquarters of rival Volkswagen.

 

 

GE soccer team by pressefoto Ulmer
Brief moment in the sun when the German team won the World Cup soccer tournament. Source: Pressefoto Ulmer

 

Nike has dominated the U.S. market for sports shoes and apparel for three decades now, a situation that Adidas has almost been complicit in bringing about.

And now, there’s a new U.S. competitor too: the apparel maker Under Armour, founded in the 1990s and already ahead of Adidas in U.S. apparel sales. The company is younger, hipper and more successful in America than Adidas.

In the first nine months of 2014, Adidas sales in North America fell by 10 percent, a disaster.

The German company had focused too much on emerging markets and neglected the United States.

“We invested too little there,’’ Mr. Hainer said. That is also a lesson for many other big German firms.

adidas 1954 imago
1954, the original soccer shoe. Source: Imago

 

 

Lesson 2: Protect and Maintain Your Brand

It was Germany’s first post-war World Cup victory in Switzerland in 1954, the so-called “Miracle in Bern,’’ that earned Adidas’ founder Adolf “Adi’’ Dassler his reputation.

With his screw-in metal soccer cleats, he revolutionized the business. For three decades, his three-stripe shoes were the most well-known label in sports apparel.

But now, there is a chink in the Adidas image.

“Adidas has done everything it can to be responsive to its shareholders and remain within striking distance of Nike,’’ said Hartmut Heinrich, a sports industry expert at the consulting firm Mistresstech in Hamburg.

But the brand has become “soulless,’’ said Franz Maximilian Schmid-Preissler. The industry consultant from Tegernsee south of Munich has been following Adidas for decades. “A brand is not just a logo, it’s a personality,’’ he said.

That’s what Adidas has forgotten.

Adi Dassler – from whose name the brand Adidas was derived – left a clear legacy at his company. The customer was the boss.

As several athletes asked him to develop shoes they could wear in showers and dressing rooms, he went right to work.

At first, the production methods of the day were insufficient to the task. He couldn’t figure out a way to mold plastic into shoe soles.

But he stayed on the case and, in the 1960s developed the right processes to do just that. The company’s plastic flip flops – the so-called Adilette in Germany – became a global hit and still generate millions in revenue for the firm.

Mr. Dassler created icons. Mr. Hainer has put the Adidas three-stripe logo on a vast array of sportshoes and clothing.

There are now not only soccer shoes but bathing suits, golf shoes and a range of wind breakers bearing the Adidas logo.

There’s also the youth line, Neo, and the expensive Y2 designer collection of Japan’s Yoji Yamamoto, fashion designer Stella McCartney and the colorful pleated slacks of the Herrn von Porsche design firm.

What is missing is a clear line that pulls it all together, an overarching strategy. The three stripes appear to be cloning themselves into irrelevance.

That has confused customers. Adidas has in effect overextended its brand.

“Adidas doesn’t make qualitatively worse products than Nike,’’ said Mr. Heinrich, the consultant.

But they are poor at communication emotion, the fastest way to a consumer’s wallet.

“At Adidas, I buy a soccer shoe,’’ Mr. Heinrich said. “At Nike, I feel like I am a part of the bigger world of (Portuguese and Real Madrid player) Cristiano Ronaldo.’’

To find out how long it takes to rebuild a tattered brand, just drive a few miles from Adidas to the headquarters of Puma.

A former professional player, Björn Gulden, has been leading the company for a year and a half.

He initially bet on the lifestyles segment, focusing on runners, soccer players and track and field athletes and their needs.

Now, Puma is rushing out shoes for grass and rubber-foam playgrounds.

But the gains are coming only slowly.

 

Vario price tags adidas no strip
Is Reebok helping? Source: Vario

 

 

Lesson 3: Consider Your Takeovers Carefully

Euphoria is not the mother of success. It is August 3, 2005.

An excited Mr. Hainer declares: “The purchase is a one-of-a-kind opportunity.’’

Adidas had bought Reebok, a rival.

“We will profit from each other,’’ Mr. Hainer predicted.

The market initially believed in the €3 billion acquisition.

Adidas’ share price soared more than 7 percent on the news.

In hindsight, it was a bad decision.

Reebok became an albatross for Adidas.

A German private bank, Berenberg Bank, recently summed it up: “To this day, the purchase has not been paid off for shareholders.’’

Following the takeover, Reebok went into decline, and its sales fell continuously for years.

Even today, the brand, which is based near Boston, is still less profitable than the Adidas brand.

Mr. Hainer should have known takeovers were risky.

In 2005, Hainer directed Adidas to sell the French ski sports maker Salomon after eight frustrating years.

Since then, the Finnish Amer group has turned Salomon around.

But Mr. Hainer wasn’t deterred by the disaster at Salomon’s headquarters at Lac D’Annecy.

His plan was simple: Reebok ranked second in the U.S., Adidas third. Together, he thought, they should be able to take on Nike.

Far from it. Reebok ran into problems, had to be restructured several times – and weighed heavily on Adidas.

Unlike Salomon 10 years ago, it’s basically impossible for Adidas to sell Reebok now.

Mr. Hainer had given the French company leeway back then, but he ran a tight ship at Reebok. The downside is that today, Adidas could merely sell off the trademark rights. That means only competitors with full-fledged sales, marketing and computer divisions might be interested. Institutional investors won’t consider Reebok because they would only buy an empty shell – that would mean a lower sales price as well.

In the end, Mr. Hainer hasn’t repeated his mistake, but has made another mistake.

 

Adidas 2015 pressebild
Adidas launched a strategy in 2010 called Route 2015. Source: Pressebild

 

Lesson 4: Analyze Growth Markets Carefully

Adidas had pinned its hopes on golf — without success. The golfing market collapsed in 2014. Adidas’ sales of golf clubs, shoes and shirts plunged almost a third in the first nine months of 2014 from the previous year. The company’s California-based golfing business is shrinking.

Mr. Hainer had managed to make Adidas the global market leader in the field, he bragged about beating Nike in one of the most American sports there is.

Nike too sells golf clothing and clubs, and even sponsors Tiger Woods. But the sport isn’t as important to Nike as it is to Adidas.

In hindsight, it’s safe to say that Nike’s U.S. chief, Mark Parker, was right to only cautiously invest in golf.

Mr. Hainer now has to tediously restructure Adidas’ golf division, Taylor-Made. He is shedding stock, delaying the launch of new products and cutting 15 percent of jobs. All that eats up millions.

But when it comes to growth markets, golf isn’t Mr. Hainer’s only bad bet. He has also missed the mark on the Russian market.

Adidas built out a retail presence of more than 1,000 shops in the Russia and other former Soviet states. Business boomed for a long time; after all, returns are highest in the company’s own stores. Adidas by far outpaced Nike in Russia. The Americans relied on local partners. That’s why the U.S. brand isn’t nearly as popular between Moscow and the Ural mountains.

But in retrospect, avoiding a big investment in Russia turned out to be a wise decision. Since the ruble’s nosedive, it doesn’t matter how many shirts and shorts Adidas sells in Russia – the exchange rate eats up its profits.

The Ukraine crisis and Western sanctions against Russia have only compounded Adidas’ misery there.

Adidas has to realize that the most promising markets are the most risky too.

 

Adidas ad by Caro Teich
An ad in Beijing for Adidas. Source: Caro Teich

 

Lesson 5: An Athlete Never Gives Up

It’s not the first time Adidas finds itself with its back against the wall. And if there is one lesson from the 66-year history of Adidas, it’s that an athlete never gives up. Nike had overtaken the Germans in the 1980s, when Adidas was undergoing radical change. Horst Dassler, son of the founder, had died unexpectedly, and no one knew what the family was going to do. “Everyone was anxious,” said Erich Stamminger, Mr. Hainer’s longtime confidant on the management board.

Horst Dassler was a pioneer in sports marketing and cultivated relationships to sports associations. Its relations to the world soccer association Fifa, its European counterpart, Uefa and the International Olympic Committee, were long Adidas’ strongest suit.

What followed were rough years and several changes in ownership. Under Mr. Hainer’s predecessor, the French entrepreneur Robert-Louis Dreyfus, and then initially under Mr. Hainer, things began looking up. Adidas became a partner at Germany’s most successful soccer club, FC Bayern Munich, where Mr. Hainer sits on the club’s supervisory board. But because Mr. Hainer at Adidas has signed expensive sponsorship deals with world-class rivals such as Spain’s Real Madrid, Italy’s Juventus Turin and Britain’s FC Chelsea and Manchester United, the Bavarians at Bayern are unhappy. They feel they’re getting the short end of the stick.

The mistakes in the U.S. market, in Russia, and in the golfing business have dashed Adidas’ chances of catching Nike any time soon.

Over the past couple of months, he has tackled several problems. Just like Nike, Adidas has restructured into divisions for each sport. This is supposed to give the company more of a punch. Research, marketing and sales used to be centralized. Now, the head of the soccer division, for example, can make his own decisions.

What is striking is just how American Adidas is becoming. Mr. Hainer has picked one of the two American board members, Mr. Liedtke, to develop a new strategy. The American’s team has been working on it for months. They plan to present their ideas by the end of March. If Mr. Liedtke, who took over as global brands chief a year ago, does a good job, it will increase his odds of becoming chief executive some day.

What is striking is just how American Adidas is becoming.

Other key positions were also given to foreign managers. Mark King, 55, an American, is the head of the North-American branch. Before that, he led the golf business and was called the “Steve Jobs of golf.” Now, he is supposed to boost the U.S. business.

He will benefit from Adidas’ biggest-ever marketing campaign that begins next week, which includes 500 sports stars from baseball and American football Adidas recruited, plus college athletes and popular musicians such as Pharell Williams and Kanye West.

The Canadian Nicole Vollebregt is based in Portland and is in charge of press relations and social media customer communications. Mr. Hainer also put another American, Antiono Zea, in charge of innovation – the most prestigious division in the company.

Even design has been shifted to the U.S. headquarter in Portland and is being led from there. Three designers have been recruited from Nike. In New York’s Brooklyn neighborhood, a new Adidas creative center has opened. Cooler, younger and more American, this is the new tune at Adidas.

Mr. Hainer is also promising to spend even more money on celebrities in the United States.

Just in time for the Super Bowl this weekend, a new Reebok advertising campaign called “ Be more Human” starts. The name says it all. Average guys are filmed as they push their physical limits, working on high bars, or lifting big tractor wheels.

Adidas is joining the NBA basketall All-Star Weekend with a big advertising campaign. And even though the campaigns are global, most of the money on them is being spent  in the United States, a spokesperson at the company’s headquarter in Herzogenaurach said.

Not everybody in Herzogenaurach likes the latest developments, or the shift across the Atlantic. Some fear that the center of power is slowly creeping to Portland. Many Adidas employees are apparently looking for a new job. If there are free positions, they apply, one industry insider said.

 

Nike shoe reuters
Wrong-footed by Nike? Source: Reuters

 

Still, it will be hard to catch the competition in the United States. Nike is wired into its home market. The Apple chairman and chief executive, Tim Cook, sits on Nike’s board of directors. There is no other way a sports manufacturer can move closer to Silicon Valley. In addition, iPhones and Apple watches are made for sports fans with several Nike tie-ins. Adidas has no comparable partner.

But lately, investors seem to be in a better mood regarding Mr. Hainer. He managed to finally reach his reduced forecasts, and sales rose in the latest period by 2 percent.

Mr. Hainer is jettisoning excess ballast. Last week, he sold the U.S. leather shoe maker Rockport to New Balance and private equity firm Berkshire Partners.

“The Rockport brand has developed positively during the past years,” he said. “But our focus is clearly sports.” For this strategy, the business unit leather shoes is “not significant,” he said. The deal generated €200 million for Adidas.

He is tinkering with the product range too. Soccer shoes don’t include four different model series anymore, but two: The classic shoe, the so-called Control line marketed by German soccer star Sebastian Schweinsteiger, and a sporty version endorsed by his Bayern Munich teammate, Thomas Müller.

Since October, Adidas shares have risen 15 percent to more than €61.

“We expect more impulses coming from the announcement of new medium-term targets in March,” said an analyst at Independent Research in Frankfurt.

Investors are waiting for signs of progress in the U.S. market, he said. In 2015, Independent Research expects Adidas to boost sales by 3 percent and earnings by 6 percent.

While still woefully trailing Nike, a positive sign is that Adidas is leading rivals Asics, Puma and New Balance.

“This is a comparison that the brand does not have to shy away from,” said Mr. Jost.

He thinks Adidas is going to get back on its feet soon.

“To sell sporting cloths for €15 billion is quite an achievement,” he said.

True, €15 billion is a lot of money. But Nike sells €20 billion. After his 14-year run at the top of Adidas, Herbert Hainer is out to prove that he still has it. As a young kid, he did the bookkeeping at his parents’ butcher shop. As a college student, he successfully co-managed a bar.

At Adidas, he remains all in – for now.

 

 

017 Adidas

 

Joachim Hofer writes about sport, high tech and IT for Handelsblatt. To contact the author: hofer@handelsblatt.com

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