Adidas: Sporting a new look

Key takeaways

• New CEO Gulden Bjorn has set ambitious targets for the company, including a 10% EBIT margin, double-digit annual sales growth, and pivoting to a wholesale model focus.
• The company’s performance in China has been lacklustre, but management is taking steps to improve it by signing additional sports assets.
• The potential for growth is there, but it will require careful management and execution. As such, it would be wise to wait for tangible results.
• Adidas parted ways with both Kanye West’s Yeezy brand and Beyoncé’s Ivy Park brand in 2023. The impact of these departures is likely to be significant.
• Lionel Messi’s move to the MLS could spark U.S. sales.

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The sporting goods industry

The sporting goods industry is expected to grow at a compound annual growth rate (CAGR) of 4.2% from 2022 to 2027, reaching a value of $488.6 billion by 2027. This growth is being driven by a number of factors, including:

• Emphasis on health and physical activity:
• A surge in sports engagement, especially among millennials and GenZ.
• A rising need for high-quality athletic apparel and shoes.
• The expanding trend of online shopping.

However, the sporting goods industry is also facing a number of challenges, including rising input costs, such as raw materials and transportation, supply chain disruptions, and geopolitical tensions. Overall, the sporting goods industry is expected to continue to grow in the coming years, but the pace of growth is likely to slow due to saturation and a low barrier to entry.

Here is a more detailed look at the outlook for the sporting goods industry in each of the major regions:

Figure 1: Sporting goods regional growth outlook. Source

• North America: The North American sporting goods market is expected to grow at a CAGR of 3.9% from 2022 to 2027. This growth is being driven by the increasing popularity of fitness and active lifestyles, as well as the growing popularity of sports participation among millennials and Gen Z.
• Europe: The European sporting goods market is expected to grow at a CAGR of 4.3% from 2022 to 2027. This growth is being driven by the increasing popularity of fitness and active lifestyles, as well as the growing demand for performance apparel and footwear.
• Asia-Pacific: The Asia-Pacific sporting goods market is expected to grow at the fastest CAGR of 5.1% from 2022 to 2027. This growth is being driven by the growing popularity of sports participation, particularly in China and India, as well as the increasing demand for e-commerce.
• Latin America: The Latin American sporting goods market is expected to grow at a CAGR of 3.6% from 2022 to 2027. This growth is being driven by the increasing popularity of fitness and active lifestyles, as well as the growing demand for performance apparel and footwear.

The North American market is the largest market for sporting goods, followed by Europe and Asia-Pacific. The Latin American market is the smallest market, but it is expected to grow at the fastest pace.

Figure 2: Regional market share. Source

As you can see, the Asia-Pacific region has now become the largest market for sporting goods, with a market share of over 33%. This is due to the growing middle class and the increasing popularity of sports in the region. North America is still the second-largest market, but its market share has declined slightly. Europe is the third-largest market, and its market share has also declined slightly. Latin America is the fourth-largest market, and its market share has remained relatively stable. The Middle East & Africa is the smallest market, and its market share has declined slightly.

Sporting trends

The sporting goods industry is a dynamic and ever-evolving industry. Esports is a growing industry that is attracting a large number of young fans. This is leading to increased demand for gaming equipment and apparel. In addition, adventure sports, such as hiking, camping, and rock climbing, are becoming increasingly popular, leading to increased demand for specialized gear and clothing. Lastly, but importantly, consumers are increasingly aware of the importance of mental health and well-being. This is leading to increased demand for sporting goods products that can help improve mental health, such as yoga mats and meditation cushions.

These dynamics aside, broader generational trends are affecting the industry deeply. We list those below:

• Personalization: Consumers are increasingly looking for personalized sporting goods products that are tailored to their individual needs and preferences. This trend is being driven by the rise of e-commerce and the ability of brands to collect data about their customers.
• Sustainability: Consumers are becoming more concerned about the environmental impact of their purchases. The demand for sustainable sporting goods products, such as those made from recycled materials or that are carbon-neutral, is, as a result, on the rise.
• Wearable technology: Wearable technology is becoming increasingly popular in the sporting goods industry. These devices can track fitness data, provide coaching feedback, and even help prevent injuries.
• Athleisure: Athleisure is a trend that has been around for a few years, but it is still going strong in 2023. Consumers are increasingly looking for comfortable and stylish clothing that they can wear both for sports and for everyday activities.
• E-commerce: E-commerce is growing rapidly in the sporting goods industry. This is due to the convenience and affordability of online shopping, as well as the wide selection of products available.

Adidas: A Brief History

Adidas, the sportswear giant that we all know today, had humble beginnings. It all started in 1924 when Adi Dassler founded the company in a quaint German town called Herzogenaurach. The name “Adidas” comes from a combination of his own name, Adi, and his last name, Dassler, forming the iconic moniker.

Olympic Triumph and Sibling Rivalry

Adidas gained its first taste of fame when Jesse Owens, a talented American sprinter, won four gold medals at the 1936 Olympics in Berlin while sporting Adidas running spikes. This victory put Adidas on the map. But things took a twist in 1947 when Adi’s brother, Rudolf, left the company on less-than-friendly terms and started his own venture, Puma, also in Herzogenaurach. This sibling rivalry heated up the sportswear world, although later on, the spotlight shifted to the fierce Adidas-NIKE rivalry.

Iconic Logo and Global Reach

The iconic three-stripe logo is synonymous with Adidas and can be seen on their sports shoes, apparel, and equipment. When it comes to sales, the majority comes from footwear, followed by apparel, and a smaller portion from accessories and gear. 

 

Figure 3: Adidas sales breakdown. Source

Adidas reaches customers through nearly 2,200 stores worldwide, and their e-commerce operation spans about 60 countries. Interestingly, most of their manufacturing is outsourced to independent partners, primarily located in Asia. Indonesia, Vietnam, and China are the top sourcing countries.

Powerful Partnerships and Marketing

Adidas knows the importance of strong partnerships. Collaborations with names like Jerry Lorenzo, Pharrell Williams, and more bring a touch of star power to their lifestyle offerings. In the world of sports, Adidas teams up with symbols like Bayern Munich, Lionel Messi, and the Boston Marathon to create an impact.

Strategic Focus for the Future

As of 2021, Adidas has set its sights on a new strategy called ‘Own the Game,’ which will guide its growth until 2025. The strategy emphasizes three key markets: Greater China, EMEA, and North America. This focus led to changes in their organizational structure, highlighting the increasing significance of the Greater China market.

In essence, Adidas’ journey from a small German town to a global powerhouse showcases its unwavering commitment to sports, style, and innovation. With a rich history and a clear strategy for the future, Adidas continues to inspire athletes and enthusiasts around the world.

Growing pains

Adidas has shown steady growth in revenue and EBITDA margins over the past 5 years. The company’s revenue growth has slowed in recent years, but its EBITDA margins have remained relatively stable. Adidas is well-positioned to continue to grow in the years to come thanks to its strong brand, innovative products, and focus on customer satisfaction.

Figure 4: Adidas annual growth and EBIDTA margins. Source: Company filings

Adidas can accelerate its growth by avoiding repeating the mistakes it made during the COVID-19 pandemic. The primary factor in Adidas’s poor performance and share decline during the pandemic was the company’s inability to quickly adapt to the changing market conditions. Therefore, it is essential for management to address the current stock shortage for the latest demand trends so that they can better compete in the coming seasons. However, the speed at which this can be implemented will depend on how quickly the company can resolve its over-inventory situation, as the pandemic related ‘over-production’ and supply chain issues have meant that older ‘out-of-style’ inventory still needs to be disposed off to make room for the newer ‘in-style’ inventory.

Here are some of the specific mistakes that Adidas made during the COVID-19 pandemic:

• Slow to pivot to e-commerce.
• No clear plan for how to deal with the supply chain disruptions caused by the pandemic.
• Did not communicate effectively with its customers and partners.

Consequently, the stock has seen a decline of 23% in returns since the onset of COVID.

Market share has been static over the last few years as shown below, which is a cause for concern.

Figure 5: Adidas market share. Source

Here are some specific steps that Adidas is taking to address the stock shortage and improve its competitive position:

• Increase production to meet demand.
• Reduce prices to attract customers.
• Partner with other retailers to expand its distribution network.
• Launch new marketing campaigns to boost brand awareness.

By taking these steps, Adidas can potentially speed up its growth and regain its position as a leading sportswear brand.

Growth doesn’t come without risks

Distribution challenges

The new CEO’s management of Adidas’ distribution strategy will be critical in the future. The company is currently shifting its focus to wholesale distribution from direct-to-consumer (DTC) sales in the mid-term. While we do not know the exact split between wholesale and DTC, management has stated that DTC will become less important. This raises concerns about profitability.

On the one hand, focusing on wholesale could save money on logistics, but it could also reduce profit margins. Selling through wholesalers could damage the brand and lead to unnecessary discounts to clear inventory. Adidas collects less customer data when it sells through wholesalers. This data is valuable for understanding customer preferences and developing new products. If the wholesale channel is not managed effectively, it could cause long-term damage that is difficult to repair. In contrast, the DTC model gives them more control and allows them to gather more information about customer preferences. Investors should keep an eye on this change.

China the weak link

Adidas has been struggling in China and its performance declined significantly in the fourth quarter of 2022. Management attributed this to a poor marketing strategy and is now actively seeking to improve its market position by signing new sports assets. 

To improve flexibility and inventory management, management plans to switch from a push to a pull market by allocating 30% of its products to in-season, local demand. They are also considering resuming celebrity marketing with previous partners.

It is worth noting that Adidas’ EBIT margin declined to 10% in fiscal year 2022, which was a decline of nearly 20 percentage points from pre-COVID levels. Ideally, the new strategy could help Adidas return to its previous margin levels. However, it is too early to say for sure and it remains to be seen if Adidas can improve its performance in China and regain its position as a leading sportswear brand in the country.

Yeezy and Beyoncé depart

Adidas parted ways with both Kanye West’s Yeezy brand and Beyoncé’s Ivy Park brand in 2023.

Adidas’s partnership with Yeezy was a major success, generating billions of dollars in revenue for the company. The partnership also helped Adidas to attract a younger and more fashion-conscious audience. However, the partnership ended acrimoniously, with Kanye West accusing Adidas of not giving him enough creative control.

Adidas’s partnership with Ivy Park was also successful, generating hundreds of millions of dollars in revenue for the company. The partnership helped Adidas to appeal to a female audience and to expand its reach into the athleisure market. However, the partnership ended after Beyoncé decided to focus on her own company, Parkwood Entertainment.

The departures of Yeezy and Ivy Park are likely to have a significant impact on Adidas’ business in the near term. The company will lose out on the revenue generated by these partnerships, and it will also lose the marketing and promotional support that these brands provided. Additionally, the departures could damage Adidas’s reputation and make it more difficult for the company to attract new partners.

Acquisitions – A Cautionary Tale

In 1995, Adidas became a publicly traded company, marking a significant milestone in its journey. Then, in 2006, the company made a big move by acquiring Reebok for $3.8 billion, a well-known brand. However, the acquisition did not go as planned. Reebok’s performance declined in the years following the acquisition, and Adidas was forced to write down the value of the acquisition by billions of dollars. In 2021, Adidas announced that it would sell Reebok.

There are a number of reasons why the acquisition of Reebok was not successful. For one, Reebok’s brand image was not aligned with Adidas’ brand image. Reebok is known for its casual and lifestyle footwear, while Adidas is known for its performance footwear. This misalignment made it difficult for Adidas to integrate Reebok into its business.

The acquisition of Reebok was expensive. Adidas paid a high price for Reebok, and the company was never able to recoup its investment. 

Here are some numbers:

• Adidas’ revenue declined by 11% in the year following the acquisition.
• Reebok’s market share declined from 15% to 10% in the same period.
• Adidas wrote down the value of the acquisition by $2.1 billion in 2019.
• Adidas announced in 2021 that it would sell Reebok for $2.5 billion, a loss of $1.3 billion.

Source: Company filings

In conclusion, the acquisition of Reebok by Adidas was a failure. When two companies with different cultures and brands are combined, it can be difficult to integrate them successfully.

Competition gaining ground

Adidas’ main competitor is Nike. Nike is the world’s leading sportswear brand, and it has a strong brand image and a wide range of products. Nike is also very active in marketing and sponsorships, and it has a strong presence in the global market.

Figure 6: Market share by sports brand. Source

Other major competitors of Adidas include:

• Puma: Puma is a German sportswear brand that is known for its stylish and performance-oriented products. Puma is also active in marketing and sponsorships, and it has a strong presence in Europe and Latin America.
• Under Armour: Under Armour is an American sportswear brand that is known for its performance-oriented products. Under Armour is also active in marketing and sponsorships, and it has a strong presence in the United States.
• Asics: Asics is a Japanese sportswear brand that is known for its high-quality products. Asics is also active in marketing and sponsorships, and it has a strong presence in Asia.

Nike’s master stroke

Nike started selling its products in China in 1980, while Adidas did not enter the market until 1990. This gave Nike a head start in building brand awareness and establishing relationships with Chinese consumers. Arguably, Nike has a stronger brand image, a better distribution network, and has been more innovative. Nike has also focused on localizing its products and marketing campaigns, and has a strong commitment to social responsibility in China. 

Lulu’s yoga focus 

Lululemon has also been more successful than Adidas in recent years for a number of reasons. Lululemon has focused on yoga and athleisure, which has appealed to a large and growing segment of the population, particularly women. Lululemon products are known for their high quality and comfort, and the company has a strong brand image that is associated with luxury, quality, and exclusivity. Lululemon also has a strong focus on customer experience, providing excellent customer service and creating a welcoming and inviting atmosphere in its stores.

In addition to these major competitors, Adidas also faces competition from smaller, niche brands that are focused on specific segments of the market. For example, Allbirds is a popular brand of sustainable sneakers. Adidas is responding to this competition by expanding its product offerings and by investing in new technologies, like AI, sustainable materials, 3D printing and robotics.

Bottom line

The sportswear industry is highly competitive, and Adidas faces a number of challenges. While Adidas has a strong brand image, a wide range of products, and a global presence, and is still well-positioned to continue to grow in the years to come, it still needs to shore up its investments to combat headwinds.  The company’s investments in innovation and sustainability, which are becoming increasingly important to consumers, should drive top-line growth alongside higher customer satisfaction.

Portfolio fit

Might be for

• Investors who are looking for innovation: Adidas is investing in innovation and sustainability, which are becoming increasingly important to consumers. This makes Adidas a good investment for investors who are looking for a long-term investment with sustainability and innovation at its core.
• Investors who are looking for a global investment: Adidas has a strong presence in the global market. This makes the company a good investment for investors who are looking to diversify their portfolio internationally.
• Investors who are looking for a steady growth investment: Adidas is a growth company with a strong track record of revenue and earnings growth. The company is also investing in new markets and products, which should drive future growth. 

Might not be for

• Investors looking for a short-term investment: Adidas is a long-term growth investment. The company is investing in new markets and products, which will take time to bear fruit. Investors who are looking for a quick profit may not be satisfied with Adidas.
• Investors concerned about the company’s debt load. Adidas has a high debt load (~2.8x net debt/EBITDA), which could be a liability in the event of an economic downturn. Investors who are concerned about the company’s debt load may want to avoid investing in Adidas.
• Investors concerned about the company’s exposure to increasing competition. Adidas faces increasing competition from other sportswear brands, such as Nike and Puma. With a ~3.5% ROIC, investors who are concerned about the company’s competitive position may want to avoid investing in Adidas.

Ultimately, whether or not Adidas is a good fit for a particular investor depends on the individual investor’s investment goals and risk tolerance. Investors should carefully consider Adidas’s risks and rewards before making an investment decision.

Disclaimer: The views expressed are relevant only to the time they were stated and may change over time. Historical performance does not guarantee future outcomes.