Mar 23 2010
on adidas
- Image via Wikipedia
“Adidas said higher marketing expenses linked to the 2010 FIFA World Cup, as well as write-downs on Reebok‘s distribution rights in China contributed to a sharp drop in operating margin…” Spending money on marketing corresponding to the World Cup, when adidas is still largely known as having a core competency in soccer, makes sense. Buying out suppliers and distributors (read: “distribution rights in China”) also makes sense, providing adidas sees itself as a low-growth anchor of a mature industry (which again is reasonable.) In the case of China, Reebok is selling off excess inventory and excess capacity—inventory and capacity that were simply overproduced reflecting adidas’ fast growth in the area coupled with the economic downturn. In most foreign countries, adidas markets itself as having high-cost, high-quality products for the wealthy (perhaps contrasting the inverse correlation of quality and wealth of the US domestic shoe marketing demographic.)
While Reebok was purchased as a way to claim market share, it has ended up a hedge against finicky brand preferences throughout the world. In some areas it is popular; in some it is not. As alluded to above, Reebok had huge sales in China in 2007-2008, which promptly stopped in 2009-2010. This led to excess inventory which led to clearance sales. The next step is or should be adidas preparing to sweep up after Reebok, much the same was Helene Curtis pretends to cannibalize on itself in the shampoo aisles of Safeway. (Suave is the hot new Salon Selectives, even though it was the low-price brand 15 years ago, when the hot new hedge was the now-cheap Finesse.)
Adidas formed in 1949, and rode spikes in popularity corresponding to jogging, soccer, and rap music—by the 1960s, 70% of the US sneaker market was held by adidas. In the 70s, the visionary owner died, and Nike was allowed to assimilate market share. In the late 80s, his son died, and Reebok became the new shoe. The new owner went bankrupt. By 1990, adidas only held 2% of the remaining athletic shoe market. At that point it was sold to a marketing company, who began buying up celebrities and ancillary companies. Adidas eventually settled with strong core holdings including TaylorMade and Reebok.
It’s all about succession planning, whether by death or by firing; all the problems happen when the culture doesn’t survive a succession or the pursuant changes in vision and strategy. Whether transitions of power caused or resulted from adidas’ internal transitions, the history of adidas cannot be studied without a lens dilated on broad market forces and their interrelated affects on the transitions within broader athletic shoe market.
Growth companies being unprepared for external forces is a common theme. What’s new is that so many of these “growth companies” are in historically mature markets, because they can mitigate the pros and cons of their maturity using the dynamics of globalization/localization. In other words, companies in historically mature markets domestically have to learn to act like growth-phase companies in other countries. While the world has always had shoes, most of it has not always had athletic shoes. While crystallized domestically, athletic shoe dominance is constantly changing hands in some country or other, both to new competitors and reinventions of old companies. Operating processes and marketing techniques in each of these countries varies widely, so the companies must learn to expand while forfeiting some assumptions of economies of scale that would otherwise be inherent to such growth.
Adidas is an example of an old mature company in a growth-phase. As an old, mature company domestically it has been allowed to bathe in bankruptcy for decades, and as an internationally growth-phase company it was able to spring back with all the economies of scale of its former self. It is able to simultaneously purchase suppliers and distributors to minimize costs and adopt market share in unexpected niches. They pay dividends to attract conservative investors, but their stock waxes and wanes by as much as 20%.
Overall, the only solution is to continue to ride the waves. The market is evolved enough that the spread of market share will not change domestically without considerable effort, and internationally there is momentum to last years into the future. Most of adidas’ problems have come from economic variations, and riding these out is the best solution. Proactively, Reebok should be consciously considered as a hedge, and marketed independently in areas where adidas’ branding is not strong.
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