adidas strategy

ADIDAS AG IN APPAREL (WORLD)

May 2012

© Euromonitor International PASSPORT 2 APPAREL: ADIDAS AG

Disclaimer

Much of the information in this

briefing is of a statistical nature and,

while every attempt has been made

to ensure accuracy and reliability,

Euromonitor International cannot be

held responsible for omissions or

errors.

Figures in tables and analyses are

calculated from unrounded data and

may not sum. Analyses found in the

briefings may not totally reflect the

companies‟ opinions, reader

discretion is advised.

adidas, the second largest

apparel brand in the world, trails

in the wake of it great rival Nike.

However, organic growth in

developing markets, acquisition

and a dynamic marketing and

brand strategy have seen it

outperform its rival over the

review period 2006-2011, and its

latest move into a more fashion-

aligned position could see it

improve global share. NEO, a

fast fashion adidas sub-brand

aimed at teenagers, will pit the

company against the likes of

H&M and Zara.

Scope

SCOPE OF THE REPORT

All values expressed in this report are in US dollar terms, using a fixed

exchange rate (2011).

All forecast data are expressed in constant terms; inflationary effects are

discounted. Conversely, all historical data are expressed in current terms;

inflationary effects are taken into account.

Apparel US$1,668 billion

Women‟s Clothing US$661 billion

Men‟s Clothing US$429 billion

Childrenswear US$147 billion

Clothing Accessories US$69 billion

Hosiery US$51 billion

Footwear US$309 billion

http://www.euromonitor.com/


STRATEGIC EVALUATION

COMPETITIVE POSITIONING

MARKET ASSESSMENT

CATEGORY AND GEOGRAPHIC

OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


German apparel company adidas AG was the second

largest apparel company in the world in 2011, trailing its

long-term rival Nike Inc. Both are primarily operators of

sports-aligned brands, and are in direct competition.

The company operates a number of brands. The

eponymous adidas brand is its principal one, generating

74% of adidas‟ total sales in 2011, according to the

company.

Reebok, its next largest brand, was acquired in 2006 for

around US$3.8 billion as part of adidas‟ strategy to overhaul

Nike; Reebok‟s brand strength in the US gave adidas a

stronger foundation in North America. Other brands include

TaylorMade (golf apparel and equipment), Rockport

(leather footwear) and Reebok Hockey/CCM (ice hockey

apparel and equipment).

adidas‟ largest regional market remains domestic Western

Europe, which generated 26% of global revenues in 2011.

However, Asia Pacific is set to overtake this going forward,

generating 24% of value in 2011 compared to 19% in 2006.

Although the company lags behind Nike in the key Chinese

market, it is the number one brand in India. Like Nike, the

company is seeking to extend its retail operations, allowing

for improved brand control.

Key company facts


adidas AG

Headquarters: Herzogenaurach,

Germany

Regional

involvement: Global

Category

involvement:

The company operates in

most clothing and

footwear categories

World apparel

value share

2011:

1.8%

World apparel

value growth

2011:

9.4% (at US$ fixed

exchange rates)




In the financial year ending 31 December 2011,

adidas saw growth in total revenues of 11.3% and

in net income of 18.3%. The company recovered

quickly from a dip in sales and income in 2009,

following weak market conditions in the wake of the

global economic crisis.

Like its great rival Nike, adidas continues to

develop sales in mature markets. The company

reported that currency neutral sales in Western

Europe, a region that continues to face significant

economic pressure, were up by 10% in 2011, and

by 15% in North America. However, operating

margins fell from 9.2% in 2007 to 7.6% in 2011, as

production costs rose sharply.

The company credits its rapid recovery on a

mixture of product development and high level

endorsements from its roster of sports stars, as

well as ongoing development of its retail division.

The company owns and operates 2,401 of its own

adidas and Reebok branded stores, and its

reported retail segment grew sales by 20% in

2011.

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adidas AG: Total Revenue vs Net Income 2007-2011

Total revenue Net Income

Source: Company report

adidas recovery driven by product and retail development





Wholesale - sales via third party retail channels -

remained the largest part of the company‟s business in

2011, generating 67% of total revenue, down from 67%

in 2010. Wholesale was among the more problematic

areas of the company‟s business over the review period,

in part because third party retailers in many countries

responded to the economic crisis by price-cutting; this in

turn undercut brand equity for adidas and Reebok.

As a result the company is seeking to push harder at

controlling retail space, not only by rolling out more of

the company-owned and -operated stores that make up

its retail segment (and generated 21% of 2011 revenue,

up from 19% in 2010) but also by extending its franchise

operations. This includes single brand adidas or Reebok

stores operated by wholesale partners, as well as a

variety of other strategies. adidas‟ retail segment was

the most dynamic in 2011, and is anticipated to continue

to be so over the forecast period.

The wholesale and retail segments comprise the adidas

and Reebok brands; the company‟s other brands,

including Rockport and TaylorMade, generated 12% of

2011 sales. The company is developing different brand

strategies for each of these.

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Total Revenues % Growth 2010-2011

adidas AG: 2011 Total Revenue by Reported

Segment and Growth

Two brands underpin segment and retail strength





The company reported revenue growth of 17% in euro terms

and 38% in net income attributable to shareholders in Q1

2012, which it attributed to growth in all of its segments.

Most impressively, adidas outperformed its rivals Nike and

Puma in China, with currency neutral growth in Greater China

of 26% y-o-y compared to Nike‟s 21%. The company has

therefore upgraded its revenue forecasts for 2012 to around

10% from a previous forecast of between 5% and 9%, with net

earnings forecast to rise by between 12% and 17%, compared

to the previous figure of between 10% and 15%.

This good news for adidas comes at an opportune moment. At

the end of April 2012, the company announced that

“commercial irregularities" at Reebok India could potentially

cost the firm up to €125 million, with further restructuring there

potentially costing up to €70 million in 2012.

Once again, the company was able to grow sales in markets

where other apparel brand operators and retailers have

struggled. adidas reported double-digit y-o-y growth in Japan

and South Korea, and 11% in currency neutral terms. The

company attributes growth to a mixture of product

development, success among its sporting endorsement roster

and most importantly a tightening grip on brand equity across

its portfolio.

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adidas AG: Quarterly Total Revenue and Net Income Q1

2011-2012

Total Revenue Net Income

Source: Company release

Latest quarterly data show adidas thriving





Historically, the company has distributed its products

through third party retail accounts, principally footwear,

sporting goods and department stores. Other sports

brands including Nike and Puma have followed this

strategy.

However, like its peers, adidas is seeking to take greater

charge of its brands, pursuing a strategy it describes as

“controlled space”.

This not only includes rolling out more company-owned

and -operated stores (it intends to open at least 550

adidas and Reebok stores by 2015) but also extending

its mono-brand franchise operations, especially in China.

It is also seeking to develop more shop-within-a-shop

operations with its principal wholesaling partners. adidas

aims to generate 45% of total sales from these controlled

space operations by 2015, compared to 36% in 2011.

At the same time, it is also looking to improve its internet

business, which it seeks to grow to €500 million by 2015.

In 2011, adidas operated online stores in the US, Asia

and Europe, and is seeking to open its first online outlet

in Latin America in 2012 as part of its strategy to add 10

new online markets over the year.

This strategy allows the company far greater

control of brand equity across the portfolio, and

the focus on mono-branded operations allows

each of its brands to maintain a unique identity.

One of the principal difficulties facing sports

brand producers in the global market is the

huge amount of counterfeit products; operating

brand stores guarantees the product‟s

provenance to discerning consumers, as well

as being a marketing tool to showcase new

products. Store sites are typically premium

located, further underpinning brand status.

Controlling the brand in the retail space


Above - Rockport brand store, Mecca




adidas has been able to develop exceptionally high

levels of brand awareness for the adidas and Reebok

brands among the consumer base. Sports and non-

sports buyers make repeat purchases of these

brands, and have characteristically shown a lack of

price sensitivity if the perceived aesthetic or function

of a new apparel product is high enough.

However, because for many users there is a great

deal of interchangeability between sports brands,

adidas is looking to strengthen its relationship with

consumers by increasing its use of social media. This

is an increasingly important strategy among apparel

companies, especially those targeting the 18-35 year-

old demographic.

adidas primarily uses existing networks; its adidas

Originals Facebook page, for example, added five

million followers in 2011 to reach 12 million. It has

also developed mobile phone apps including miCoach

Football and miCoach Running that allow users to

upload statistics to an interactive training site. The

company uses these tools to build product awareness

and engage directly with consumers, for example

offering the opportunity to participate in brand design.

adidas slightly lags behind its principal rival Nike

in this strategy, largely because Nike dominates

the North American market where consumer use

of these media is at its most developed. These

are extremely effective platforms to disseminate

new product information, build brand loyalty and

heighten product awareness, especially among

young consumers; at the same time it supports

the brand position for adidas and Reebok in

particular as tech-led, early adopting and youthful.

Social media use supports brand proposition


Above - miCoach,adidas’ interactive training app




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adidas AG: Global Revenue by Brand 2006-2011

adidas Reebok

TaylorMade/adidas golf Rockport

Reebok/CCM Hockey

67% 73% 69% 73% 73% 74%

Note: % figure above shows share generated by adidas brand

The company has identified three “attack markets”,

geographic regions that it is focusing on. These are

North America (where Reebok is the company‟s key

brand following acquisition in 2006), Greater China

and Russia/CIS; these markets are anticipated by

adidas to produce 50% of future growth to 2015.

The focus is therefore on emerging markets, and

leverage of the adidas brand itself is used to grow

global sales. The brand generated 74% of revenue in

2011, compared to 67% in 2006.

The company has supported this brand in particular

with some of its highest-profile sports sponsorships,

supplying uniforms to football teams including Real

Madrid, AC Milan and the World Cup-winning Spanish

national team. At the same time, it has used fashion

designers including Stella McCartney and Yohji

Yamamoto to develop a fashion position for the brand.

These strategies have underpinned global

awareness, and made the adidas brand the principal

tool for expansion. The fact that it is less

characterised by specialisation also helps; its ice

hockey and golf brands, for example, are less use in

markets such as India and Brazil.

Biggest brands lead global charge





Since the 2006 acquisition of Reebok, the company has had a stable of five

brands, and within those brands, a variety of subbrands. adidas, for example,

is split into adidas Sport Performance, focusing in particular on football,

basketball, running, training and outdoor, as well as adidas Sport Style, a

collection of lifestyle brands including adidas Originals, Y-3, Porsche Design

Sport, adidas SLVR and adidas NEO.

This lets adidas target the widest possible group of consumers, without

compromising the perceived core competency and position of a particular

brand. It also lets it adopt mass-market or niche positions and increases its

ability to develop new markets in both category and geographic terms.

The company has historically expanded both organically and by acquisition,

and continues to do so. In November 2011, the company announced its

purchase of Five Ten, an outdoor action sports brand for US$25 million. This is

in line with its Strategic Business Plan Route 2015, where the company

anticipates sales in the outdoor segment to top €500 million by 2015.

Interestingly, it also puts adidas brand portfolio into more direct alignment with

its great rival Nike. The adidas and Reebok brands compete directly with the

Nike brand, TaylorMade is in opposition to Nike Golf, Rockport and Nike‟s Cole

Haan brand are both premium leather footwear brands, adidas Originals are

similar to Nike‟s streetwear/retro Converse brand, and the Five Ten brand is

similar to Nike‟s Hurley brand. Only the CCM ice hockey brand (a sport that

has relatively limited global marketing potential) lies open to adidas, although

only since Nike disposed of its Bauer Nike Hockey unit in early 2008.

Multi brand strategy allows numerous positions





STRENGTHS

OPPORTUNITIES

WEAKNESSES

THREATS

adidas products are well

designed, have a strong

reputation for aesthetics

and function; this

underpins brand loyalty

and response to new

products, despite higher

prices.

Design competence

The company has an

exceptionally strong

group of brands, heavily

supported by

sophisticated marketing,

that allows the company

to quickly develop new

category and

geographic markets.

Strong brand portfolio

The company lags

behind Nike in scale,

and in many cases in

terms of innovation; it

has a far smaller e-

commerce operation, for

example, than its main

rival.

Relationship to Nike

Although the company

is developing its

controlled space

strategy to control retail,

most sales are still via

third party retailers. This

risks brand equity.

Dependence on retailers

adidas can strengthen

the bond between brand

and consumer with

social media and

smartphone apps.

Social media

The development of its

own stores, as well as

franchises and in-store

outlets should drive

sales as well as support

prices and brand equity,

while guaranteeing

provenance.

Retail growth

“Negative behaviour” by

the athletes and teams

that endorse adidas

brands could

substantially harm brand

equity.

Endorsement failure

All sports brands suffer

from large amounts of

counterfeiting, especially

in the emerging markets

targeted by adidas,

where brand

development is at its

most brittle.

Counterfeit

SWOT: adidas AG





adidas consumers expect a constant stream of

innovation and design updates. This will be a

constant challenge for the company going forward,

especially as it expands into new markets where

tastes and functional demands may differ.

adidas‟ operation of a variety of brands gives it a

competitive edge, allowing it to appeal to a broader

consumer base audience than many of its

competitors. Further acquisitions could significantly

boost sales, especially in areas where the

company has identified growth such as outdoor or

adventure sports.

adidas is seeking to increase revenue generated in

retail space that it directly or indirectly controls.

This is partly in response to counterfeiting, as

adidas-branded outlets offer a greater guarantee of

provenance. More importantly, it underpins quality

and price control, both crucial to brand position. At

the height of the economic crisis in 2008 and 2009,

many retailers cut prices heavily to move stock,

seriously compromising adidas‟ brand strategy.

Like Nike, the company‟s marketing success has

been based on the achievements of sports stars

and teams. Identifying potential is a key challenge

for the company, as it seeks to develop emerging

markets; consumers in China, for example, have

no long-standing loyalty to a team such as Real

Madrid, but will respond to sporting success when

making a purchase.

Controlled space in retail Backing the right horse

Multi brand, multi position Relentless product development

Strategic objectives and challenges





adidas perhaps has a stronger

fashion offer than its main rival

Nike, a fact that it has

underlined with a number of

joint ventures with couture

designers. It is now seeking to

build on this by expanding its

adidas NEO fashion outlets, a

fast fashion subbrand that is

aimed squarely at teenage girls.

adidas aims to generate €1

billion in revenue like this by

2015; this strategy will on the

one hand allow it to differentiate

its portfolio, especially in

comparison to Nike, but will also

bring it up against brands such

as Zara and H&M.

Greater fashion/sport

crossover

According to the WTO, fake

brands generated US$500

billion a year in sales in Latin

America in 2011, equating to 8-

10% of all commerce. High-end

sports brands such as adidas

are vulnerable to this, especially

in the emerging markets the

company has targeted for future

growth. Controlling retail space

allows the company to resist this

to a certain extent, but inferior-

quality imitations will always be

a challenge to the company‟s

brand position.

Resisting the replicas

Rising commodity costs over

the review period have been a

challenge for all apparel

producers, and will continue to

be so in future. The issue has

taken a significant share out of

adidas‟ gross margins, and

managing this in future will be

extremely challenging.

Managing production costs

Strategic objectives and challenges






MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Apparel: Top Global Companies by Value Share

2007-2011

Company

5-year

trend in

share

growth

2007

2008

2009

2010

2011 2011

%

share

Nike Inc 1 1 1 1 1 2.2

adidas AG 2 2 2 2 2 1.8

Inditex, Industria

de Diseño Textil

SA

4 4 3 3 3 1.0

H&M Hennes &

Mauritz AB 5 5 5 4 4 1.0

Gap Inc, The 3 3 4 5 5 0.9

Cofra Holding AG 6 6 6 6 6 0.6

Fast Retailing Co

Ltd 13 9 7 7 7 0.6

Hanesbrands Inc 7 7 8 8 8 0.4

VF Corp 10 10 10 9 9 0.4

Levi Strauss & Co 8 8 9 10 10 0.4

The global apparel market is fragmented, reflecting localised fashion preferences. The fact that two sports brand producers, Nike and adidas, ranked first and second, respectively, throughout the review period may be attributed to the functionality of their products cuts across regional tastes.

However, global share for both brands is underpinned by massive marketing spend, and exercise is not always a purchase factor. Both offer a brand position that is a mix of high technology and “street” fashion aimed at younger consumers.

At the top of the market, there has been a concentration in share, as leading producers push into emerging markets such as China and Russia. Sports brands and “fast fashion” (cheap products produced at speed that mimic catwalk trends) brands were most dynamic over the review period.

Those producers that have lost share have typically failed to adapt to new market conditions; Gap, for example, has failed to follow the new, flexible fashion model, and as a result has lost ground to peer brands such as Inditex‟s Zara.

adidas always the bridesmaid





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adidas AG: Competitive Performance by Value vs Global Apparel Market 2007-2011

World Nike Inc. adidas AG

A: 2007 - The acquisition of Reebok, completed in January

2006, and double-digit growth in

Asia Pacific and Eastern Europe

drives growth.

C: 2011 - The company‟s marketing, product development

and own retail strategies drive

growth; North America sees sales

development of 14% and 15%,

respectively, in 2010 and 2011.

B: 2009-2010 - Plummeting consumer confidence in Western

Europe and North America sees

orders from third party retailers

decline.

adidas has started to outperform Nike


A

B

C

adidas has outperformed the global apparel market over the review period; more importantly, it has started

to outperform its greatest competitor Nike.




Nike is the largest apparel single brand in the world, with a

2% share of sales in 2011. adidas‟ principal two brands,

with which Nike competes on almost every front, held a

combined 2011 global share of 1.8%, up from 1.3% in

2006, and ranked second and 12th.

The competitive environment in sports apparel is

extremely intense. There is a high risk of substitution for

consumers using these products for exercise, as these

brands offer basically the same products. Developing

differentiation is difficult, although sports brands have

begun to develop greater consumer loyalty through

massive marketing expenditure, brand control via retail

and social media initiatives.

The environment is also one in which competitors

aggressive pursue market share. adidas‟ ability to keep

building global share depends on rapidly and repeatedly

getting marketing and product decisions right.

The company seeks to build differentiation in other ways,

such as carefully selecting its sports endorsements.

Currently, for example, adidas produces the uniform for

football giants Real Madrid, while Nike produces that of

chief Spanish rivals FC Barcelona. AC and Inter Milan are

also equipped by the two different brands.

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adidas and Reebok: Competitive Performance by Value vs Other

Leading Sports Brands 2007-2011

Nike adidasReebok PumaConverse Champion

Sports brands seeking ways to build loyalty





Strengthening presence in emerging markets


Market leadership

Nike

adidas

adidas‟ future global development is likely to be based on its strength in key merging markets. It is the leading brand in Russia and India, and the leading brand overall in Eastern Europe and Latin America. It has, however, lost share in China over the review period, which it will seek to address going forward.





MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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adidas AG: Apparel Presence and Growth Prospects by Category 2011-2016

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Opportunity Zone

adidas AG is present across a wide number of categories. Its portfolio is primarily sports aligned; even its

Rockport footwear brand offers “outdoor” products. This means that its core opportunities are in footwear,

men‟s outerwear and women‟s outerwear, the largest global categories and adidas‟ key opportunities.

However, women‟s products were the most dynamic for the company in 2011, with sales of women„s

outerwear, clothing accessories and underwear, nightwear and swimwear growing by 12.6%, 17.8% and

21.4%, respectively, albeit from a lower base, as the company rolls out more of its adidas NEO stores.

Footwear is the company's core business, generating 60% of adidas‟ 2011 sales compared to 62% in 2006.

However, it was also the least dynamic category for the company, growing sales by 9.1% in 2011. This is

still solid growth, but the company may need to investigate ways of adding value to the category in future.

Fashion products most dynamic

MARKET ASSESSMENT

Footwear

Childrenswear

Women's underwear, nightwear

and swimwear

Hosiery

Clothing

accessories Women‟s outerwear

Men‟s outerwear

Men's underwear,

nightwear and

swimwear

Market size 2011 (US$ mn RSP)

Note: Bubble size indicates company share of category in 2011, range displayed: 0.2-5.8%




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adidas AG: Apparel Presence and Growth Prospects by Region 2011-2016

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Opportunity Zone

The scale of Western Europe, Asia Pacific and North America make them the greatest opportunities over

the forecast period for adidas. The company has in fact identified Russia/CIS, Greater China and North

America as its attack markets, and will focus most on them over the forecast period.

The apparent lack of dynamism in Western Europe is less of a problem for the company, which in its

annual report claimed to have grown sales by 10% in the region. adidas‟ strong brand equity, heavy spend

on marketing and its push into retail are likely to continue to drive growth in the region, despite its ongoing

economic difficulties, and high levels of disposable income continue to characterise the region.

adidas‟ Asia Pacific operations could be improved; it ranked fifth in China in 2011, compared to second in

2006. However, it is well set up in India, and the boom in middle-class consumers in both markets offer

plenty of marketing opportunity for the company. Other emerging markets, notably Latin America where

adidas is the leading apparel company, offer similar trends and opportunities.

Well-balanced global presence

MARKET ASSESSMENT

North America

Latin America

Eastern Europe

Australasia

Middle East and

Africa

Asia Pacific

Western Europe


Note: Bubble size indicates company share of region in 2011, range displayed: 1.2-2.9%





MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


adidas outperformed all of its global markets over the review period with the exception of Latin America. The strength of the company‟s offer and its branding in particular have driven this trend, even in more mature markets such as Western Europe that have seen consumer confidence undermined by the global recession and the Eurozone crisis.

Development of sales in emerging markets has been in many ways easier. Regions such as Asia Pacific have seen an explosion in numbers of middle-class consumers with rising levels of disposable income. Consumer response to marketing and branding has driven growth for many large global apparel brand producers as a result, and adidas‟ high visibility, brand credibility and rapid product development has given it a competitive edge.

The company followed similar brand strategies in developed markets, but operates different sales models. Company-owned retail operations in Western Europe, for example, generated 13% of 2011 sales for the adidas and Reebok brands; in Eastern Europe, retail generated 24%. adidas is seeking to change this, and with the help of the far more developed e-commerce systems in developed markets, as well as higher digital media penetration and use, should be able to do so over the forecast period. Developing market-specific sales models as it seeks to drive harder at controlling retail will be a challenge for the company.

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Asia Pacific Australasia Eastern Europe Latin America Middle East andAfrica

North America Western Europe

% C

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R 2

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6-2

01

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adidas AG vs Total Apparel: US$ Million Fixed Exchange Rate, % CAGR 2006-2011

Total Apparel

adidas AG

Evolving distribution for different markets

GEOGRAPHIC AND CATEGORY OPPORTUNITIES




Brazil, Russia, India and China still hold the greatest potential for sales growth going forward in the global apparel market; all of them promise to deliver a CAGR of between 6% and 10% between 2011 and 2016.

However, the scale of the market in China makes it the number one target for manufacturers of international apparel brands. Exponential economic growth underpinning a rise in disposable incomes, a developing retail network and a large population of young Chinese eager for Western fashion will drive sales of apparel. adidas has identified the market as one of its primary development targets over the forecast period.

The debt crisis in the Eurozone (one of the company‟s largest export markets) and growing demands from trading partners for China to raise the value of its currency, making Chinese exports more expensive, may cool demand for consumer goods there. However, it is the scale of the consumer base and its long-term potential that makes it so central to adidas‟ strategy.

adidas also finds itself well positioned in the other nine leading global markets; of the 10 forecast to see strongest growth in absolute terms, adidas has a higher market share than Nike in four of them.

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China Russia Brazil India US Canada South Africa Hong Kong,China

Ukraine UK

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Most Dynamic Apparel Markets and adidas and Nike Company Shares

Absolute Value Growth 2011/2016 - US$ bn % CAGR 2011-2016 Nike Inc % Company Share adidas AG % Company Share

BRIC economies are lead prospects for adidas





Although adidas has seen solid sales growth in

China over the review period, generating a

CAGR in fixed terms of 14.9% between 2006 and

2011, it has underperformed other leading sports

brands in the market.

Nike, the market leader in China, generated a

CAGR of 17.2% over the same period, and

domestic producers including Anta (CAGR of

46.2%) Li Ning (21.4%) and Xtep (65.2%) have

all made significant gains.

adidas‟ share has slipped from 2008‟s high, and

local manufacturers are increasingly offering a

credible alternative to the country‟s brand-

obsessed consumer base. Li Ning boosted its

advertising spend as a proportion of revenue to

16% in 2011, one third more than Nike, and tied

up marketing deals with the NBA, retired player

Shaquille O'Neal and the Spanish national

basketball team.

China is clearly integral to adidas‟ long-term

growth - in 2011, the market generated 6% of

total sales compared to 4% in 2006 - and it

needs to take a stronger hold of the market.

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Apparel Market Share Development in China of Sports Brand Producers

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Nike Inc adidas AG

Anta (China) Co Ltd Li Ning Co Ltd

Xtep International Holdings Ltd Peak Sport Products Co Ltd

China Dongxiang Group Co Ltd

adidas needs to pick up the ball in China





The company believes that despite the growth in share

of domestic manufacturers, international brand

producers are the key drivers of growth in the Chinese

sportswear market. Having lost pace in the market over

the review period, adidas aims to recover share by

investing heavily in marketing, for example, by boosting

its presence in basketball, a sport that it has traditionally

paid less attention to.

adidas has also sought to develop a stronger

relationship with recreational athletes in China, an

increasingly important area of the consumer base. It

sponsors the Beijing Marathon, and is seeking to

develop more running sponsorships in smaller cities.

The company has also sought to increase visibility via

fitness chains, giving clothing to fitness instructors and

buying advertising space in locker rooms and over

treadmills. The emphasis is very much on urban

consumers, with smaller cities whose middle-class

consumer bases are less developed a particular priority.

However, its key China development strategy appears

to be to increase its retail presence, and it aims to open

2,500 outlets by 2015, most of which will be located in

third- and fourth-tier cities.

Chinese investment to recapture share


According to the company, Greater China

generated 12% of Wholesale revenue in 2011

and 6% of Retail; adidas is seeking to flatten the

difference. Brand control in a market plagued by

counterfeit production is a key reason for this.

In 2011, the company opened a number of

stores for its Rockport brand, and already

operates a number of mono-brand adidas

outlets. Most store expansion will be of the

adidas NEO format. The company also operates

a limited amount of e-sales in the market, via

China's biggest web retailer, Taobao.com. Once

again, sales are limited, but hold high potential.

Above - adidas billboard in Shanghai. The company seeks to

increase its basketball presence to capture share in China.




adidas is the leading apparel company in India with a 1.2% share of value sales based on its Reebok and adidas brands. The Indian apparel market is anticipated to see a CAGR of 5.9% over 2011-2016, and will show the fourth largest growth of all global markets in absolute terms. Growth over the review period has been exponential, with the company generally hitting high double figures.

Reebok is the stronger of the two brands with a share of 0.7%, based on its dominance of the cricket market; it supplies uniforms to the Indian Premier League, one of the most dynamic sports franchises in the world, as well as equipment, apparel and footwear. Cricket is a national obsession, and marketing opportunities are enormous.

Most importantly, the company had the market largely to itself in 2011, as Nike has yet to develop a visible presence, despite manufacturing in the country (and also supplying the uniform for India‟s 2011 Cricket World Cup-winning team).

However, adidas may be on the point of jeopardising its success in India. At a time when the Indian government has indicated it may greatly liberalise foreign direct investment in the retail market, adidas announced plans in May 2012 to close a third of its 1,000 Reebok stores in India

The company needs to overcome internal problems in India; in May 2012, the company asked the Indian authorities to launch a criminal probe into unspecified “commercial irregularities” at Reebok India. Nonetheless, a booming middle class and the second largest consumer base in the world offer great potential, and the company may instead build retail sales via more NEO stores. This could help develop clothing sales, which generated just 20% of revenue in 2011.

Indian dominance may be in the balance


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Top Five Apparel Producers in India, Value Growth in Fixed US$

Exchange Rate Terms 2006-2011

adidas AG Aditya Birla Group

Future Group Bata Ltd

Raymond Ltd




Russia and Ukraine have consistently generated the company‟s strongest sales over the review period, with CAGRs of 31% and 38%, respectively, over 2006-2011. Both are anticipated to see a CAGR of around 7% over the forecast period, and as such are core markets for adidas to focus on.

Part of the company‟s success has been its ability to develop a strong retail division in Eastern Europe. In what it reports as European Emerging Markets, Wholesale sales of the Reebok and adidas brands generated 5% of global values, and Retail 38%.

Again, rising wage levels and relatively low unemployment have underpinned demand for sporting goods, and the newness of these markets means that company has been able to control its offer more effectively.

Russia in particular is a core market for the company, and was its third largest national one after the US and China in 2011. It is also where new retail strategies have been rolled out first – in 2011, the company opened 29 NEO stores there after trialling the format in Hamburg.

Russian strength underpins regional dynamism


The company has significant promotional opportunities going forward in these markets - Ukraine is set to co-host the 2012 European Football Championships, and Russia the 2018 Football World Cup, and adidas supplies kit to both. adidas is the leading apparel company in Russia, and as a result the leader in Eastern Europe overall. It is exceptionally well positioned to develop its market share going forward.

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adidas AG: Apparel Presence and Growth Prospects in

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Note: Bubble size indicates company share of country in 2011, range displayed: 0.6-2.1%

Russia

Czech Republic

Hungary

Poland

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Ukraine

Opportunity

Zone




adidas significantly outperformed the North American apparel market over the review period, with the

exception of 2008-2009 when weakened consumer confidence saw brands at higher price positions suffer.

More importantly, it began to outperform domestic giant Nike by the end of the review period.

The company has been able to do so by focusing on the most dynamic parts of its market there, including

running and training, and increasingly basketball. Historically, the adidas and Reebok brands have lagged

behind Nike in the NBA; however, adidas has increased its spending on basketball sponsorship, providing

uniforms for the teams, as well as tying up stars such as Derrick Rose to sponsorship deals.

Distribution strategy has also been crucial to brand growth for the company‟s portfolio; as in other

geographies, it seeks to control its portfolio via a tightened grip on retail. Where possible, it has sought to

expand retail operations into high-quality malls and sporting goods stores; e-commerce is also a key part of

its regional sales. As such, North America has been designated one of its key attack markets for the future,

despite a CAGR of only 0.7% forecast for the region between 2011 and 2016.

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adidas AG: Competitive Performance by Value vs North American Apparel Market 2006-2011

North America adidas AG Nike Inc

adidas bucks apparel trends in North America





Surprisingly, the company regards the UK as a

market with considerable opportunity; this is

despite the fact that consumer confidence in 2012

has fallen to new lows and the country is faced with

double dip recession.

The UK generated less than 2% of the company‟s

global sales in 2011. However, adidas is a principal

sponsor of the London 2012 Olympics. Only adidas

branding will be visible at all the events, and it is

using this as a platform to present the brand as a

mix between high tech and high fashion.

British designer Stella McCartney, for example,

has been chosen to design the uniforms for the

British team, and the designs have been well

received in the fashion press.

There has also been a great deal of emphasis

placed on the technological advances in its

products for the Games; the new adizero Prime SP

running spikes, for example, are 62% lighter than

the Beijing 2008 Demolisher spikes. Although a

minority of consumers are likely to purchase these

specialist running shoes, it cements the company‟s

reputation as an innovator.

Premiership football in the UK also continues to be

a vital marketing tool for the company. English

football is among the most in demand and watched

in the global market, and adidas uses the league to

showcase product development in both the adidas

and Reebok brands as well as repeatedly underline

brand awareness. Again the company is seeking to

expand its retail operations in what it regards as a

crucial market; its importance appears to be as

much about its global visibility as actual sales.

UK a key marketing arena for adidas


Above - Stella McCartney UK Olympic uniform launch, 2012.




adidas is primarily a sportswear brand; although many of the brand‟s

consumers buy it as casual wear rather than to exercise in, product

development has in general been explicitly sports linked.

However, the company is seeking to roll out stores for its adidas

NEO brand in a number of global markets over the forecast period.

NEO is aimed at style-adopting teenagers aged between 12 and 19

years, with an emphasis on fashion rather than sports performance;

it has lower price positions and in many ways appears to be closer to

“fast fashion” brands such as H&M.

adidas NEO debuted in the US and China in July 2008 and has

since expanded to most European countries and Japan. The

company aims to generate €1 billion via the subbrand by 2015, and

outlets are set to rise. The current network includes close to 30

outlets in Russia, 10 in Germany and 60 in India.

The teenage focus means that the company is placing greater

emphasis on the use of new social media and digital marketing to

support the brand. One innovation is the Social Mirror, an interactive

mirror for the stores that allows customers to take photographs of

themselves, which can then be uploaded to Facebook or Twitter.

Developing this brand also means a step away from the sports

sponsorships that have characterised brand development over the

review period. Faces for NEO include musicians such as Trace

Cyrus, Jessica Brando and Kylee.

adidas NEO a step in a new direction


Above - NEO flagship store, Hamburg




Some of the company‟s most dynamic growth over the review

period has come from women‟s products. In total, women‟s

clothing generated 6.5% of company sales in 2011, up from 5.9%

in 2006, and generated a CAGR of 9.6% over the same period

compared to 9.1% for men‟s clothing.

Much of this development in sales has come from consumer

trends; there has been a marked take-up in training and running

by women, and as a result strong demand for exercise clothes

that are lightweight and fashionable. adidas‟ joint venture with

Stella McCartney is part of this trend, but there has also been a

surge in demand for “urban” sportswear that has to a certain

extent filtered into the fashion market overall.

Women‟s clothing is forecast to generate a CAGR of 3% in the

global market over the forecast period compared to 2.6% for

men‟s. The company‟s cross fertilisation of its sports/training offer

with credible fashion products puts it an extremely good position

to exploit this trend in future.

Much of its product development in 2011 has been in support of

this; the adilibria TechFit women‟s training collection, and the

adidas by Stella McCartney gym collection. The company

believes that the women‟s segment offers long-term potential,

and the ongoing fusion of sports and lifestyles will inform product

development for women over the forecast period.

Women‟s categories show promise


Above - part of the adidas by Stella McCartney

2012 collection.




Like other parts of the consumer goods market, sportswear has

seen technological advances add function to products within it, and

consumer response to this has been very strong.

Much of the company‟s product development has been connected

to reducing weight; the ultra-lightweight adizero group of products,

for example, is marketed as improving speed by reducing product

weight, often by mere grammes. This offers the bonus of allowing

the company to sell products that use fewer materials at higher

price points, which in turn can be positioned as part of its

sustainability strategy.

Other product development includes the adizero f50 miCoach

Speed_Cell football boot, a product that incorporates the

company‟s Speed_Cell technology and allows users to track the

foot‟s speed, acceleration, and distance travelled, then wirelessly

transmits performance data to a smartphone or computer. Again,

this allows the company to develop superior price positions for its

products, as well as underlining the large amounts of innovation

and technology that are being used in product development.

The development of these products may also play a part in the

company‟s ongoing move into retail. Using functionality to underpin

price position makes good commercial sense, but function needs

to be underlined by sales staff and marketing; allowing the sale of

these products via third party retailers risks undermining equity.

Growing demand for functional apparel


Above - Barcelona player Lionel Messi and

Chicago Bulls’ star Derrick Rose with the adizero

products they endorse.





MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


The adidas brand is by some considerable distance the

company‟s number one brand by value sales, generating

82% in 2011, up from 79% in 2006. This underlines the

company strategy of using the adidas brand, often in

subbrand formats, to break into and develop emerging

markets.

There is limited regional variance between revenue

share by brand, although the company‟s “other brands”,

including Rockport and Five Ten have very limited

market share outside North America.

The company‟s focus on adidas makes operational

sense, as it simplifies and reduces the cost of marketing.

However, there is little conflict between the company‟s

separate brands, and should the company look to

expand their sales internationally (as it seems likely it

may do with the Five Ten brand), there is little risk of

cannibalisation.

However, although the adidas brand is clearly the most

dynamic and important to the company, operating a multi

brand portfolio is central to its development strategy, as

it allows the company to cover the broadest possible

segment of consumers, while keeping individual brand

messages clear.

Well-balanced brand portfolio

BRAND STRATEGY

adidas AG: Global Apparel Value Sales by Brand 2011

adidas Reebok Other Brands




adidas looks to direct its marketing and product development at specific user groups. This has partially

underpinned its acquisition strategy over the review period; Five Ten, for example, is an action sports

brand, one of the fastest-growing sportswear categories, and can be marketed with no threat to the rest of

the company‟s portfolio.

adidas is keen to avoid any cannibalisation among its brands. Even the adidas and Reebok brands that

offer a broadly similar range of products are being marketed differently by the company.

The adidas brand is targeted more at competitive sports (although in fact the different subbrands within

adidas make it more nuanced), while the company claims that the Reebok brand is positioned more as a

fitness portfolio.

Increasingly, the company is seeking to create differentiation between its two main brands wherever it can.

The adidas brand, for example, has an explicit fashion position, although performance and sports

specialisation also remain key.

Reebok‟s fitness position means that innovation tends to be led more by improving performance levels,

although in reality these innovation advances are not brand exclusive.

Segmentation allows consumer-specific marketing

BRAND STRATEGY




Segmentation clearest in adidas Sport Style

BRAND STRATEGY

Perhaps the best example of the increase in

brand segmentation practised by the

company is in its Sport Style subbrand. Sport

Style is the more clearly fashion-aligned part

of the adidas brand, although again these

products are almost always sport aligned.

Within Sport Style there is segmentation

made by age group. The NEO brand is aimed

squarely at fashion-conscious teenagers, and

is more of a fast fashion brand. adidas SLVR.

is aimed at 24-36 year-olds, and is positioned

as a sports fashion brand with German

aesthetics, sold via department stores.

Y-3 is aimed at the same age group, but its

alliance with Japanese designer Yohji

Yamamoto gives it a more boutique feel,

while the Porsche Design P‟5000 joint

venture targets male consumers over the age

of 35.

Again, this allows the maximum coverage of

a consumer base without compromising

brand status. The company does this

throughout the portfolio.

Clockwise from top left - adidas Sport Style subbrands Porsche Design

P’5000, Neo, adidas SLVR., Y-3 Yohji Yamamoto.




adidas looks to direct its marketing and product

development at specific user groups. This has partially

underpinned its acquisition strategy over the review period;

Five Ten, for example, is an action sports brand, one of the

fastest-growing sportswear categories, and can be marketed

with no threat to the rest of the company‟s portfolio.

adidas is keen to avoid any cannibalisation among its

brands. Even the adidas and Reebok brands that offer a

broadly similar range of products are being marketed

differently by the company.

The adidas brand is targeted more at competitive sports

(although in fact the different subbrands within adidas make

it more nuanced), while the company claims that the Reebok

brand is positioned more as a fitness portfolio.

Increasingly, the company is seeking to create

differentiation between its two main brands wherever it can.

The adidas brand, for example, has an explicit fashion

position, although performance and sports specialisation

also remain key.

Reebok‟s fitness position means that innovation tends to be

led more by improving performance levels, although in

reality these innovation advances are not brand exclusive.

Focus on consumer-specific marketing

BRAND STRATEGY

Above - the company operates different logos for its adidas

Sport Performance and adidas SportsStyle products.




adidas brand ambassadors support image building

BRAND STRATEGY

adidas‟ iconic 3-stripe logo is globally recognised, although each of the

three subbrands, Sport Performance (sports aligned) Sport Style

(fashion aligned) and Originals (heritage/retro/urban aligned) uses the

stripes differently in their logos. adidas‟ massive marketing spend and

use of endorsement from leading sports stars and teams, as well as

musicians and actors underpin global awareness.

The list of brand ambassadors is impressive; the current roster

includes Lionel Messi, David Beckham (who has a designer line),

Snoop Dogg and the world and European football champions Spain.

adidas provides uniforms for the NBA, while the UEFA Champions

League final in 2012 will be contested between Bayern Munich and

Chelsea FC, two adidas-equipped teams.

The brand‟s principal competitor in the global market is Nike. Like

Nike, adidas AG is seeking to increase its control of the retail of its

eponymous brand. This is partly to protect brand integrity from

counterfeiting in the emerging markets that the company wants to

develop in the long term, but also to strengthen grip on marketing the

increasing number of subbrands correctly.

In terms of image, adidas has a number of key advantages, notably a

far longer heritage than Nike (this, incidentally, underpins the Originals

offer). In terms of value sales, adidas outstripped Nike over the review

period, posting a CAGR of 9.9% over 2006-2011 compared to Nike‟s

7.9%

Top to bottom - logos for adidas Sport

Performance, adidas Sport Style and adidas

Originals





MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Manufacturing

adidas AG is headquartered in Herzogenaurach, Germany. Almost all of the company‟s apparel is

produced by third party contractors, primarily in Asia Pacific. In 2011, adidas increased the number of

independent manufacturing partners it works with to 308, up from 270 in 2010; this is a reflection of the

company‟s push into new markets as well as new sourcing markets such as Cambodia.

China was the company‟s principal source of footwear, generating 35% of volumes in 2011, followed by

Vietnam with 29% and Indonesia with 26%. Total shoe volume production in 2011 was 245 million pairs of

shoes, up from 219 million in 2010. There was a similar mix of sourcing for clothing; China generated 35%

of 2011 volumes, Thailand 14% and Indonesia 11%. adidas‟ suppliers manufactured around 321 million

units of clothing in 2011, up from 301 million in 2010, and the largest single factory produced 8% of clothing

volumes.

adidas AG global operations

OPERATIONS





MARKET ASSESSMENT


OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


The company‟s adidas NEO concept and the roll-

out of stores in support of the brand will bring it into

the fast fashion market. Not only does a stronger

fashion alignment widen its consumer base, but it

could be used to leverage a clearer differentiation

between adidas and Nike, a factor that could be

increasingly important when trying to develop new

consumer relationships and loyalties.

The company has made a series of acquisitions

over the review period in line with its multi brand

strategy of segmentation. In the current economic

climate, where smaller producers in developed

markets may be finding life difficult, there should be

scope for well-targeted acquisition.

The loss of share in China over the review period

appears to be in recovery, but the scale of the

opportunity in the market is so great that adidas

cannot afford to lose share to its competitors there.

The investment in marketing, especially in NBA

sponsorship, should pay off and the ongoing roll-

out of stores will also help.

adidas has explicitly stated that it wants a tighter

grip on the retail of its products; this makes perfect

strategic sense as a way of supporting brand

equity. The company could be even bolder in

developing stores, and in particular strengthening

its e-commerce position in emerging markets.

Recover China initiative More retail

Further acquisition Push harder at fashion

Key recommendations: focus on retail and fashion

RECOMMENDATIONS




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