Adidas Strategy

ADIDAS AG IN APPAREL (WORLD)
May 2012
SCOPE OF THE REPORT
Scope
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.
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.
Apparel US$1,668 billion

Womens Clothing US$661 billion Mens Clothing US$429 billion Childrenswear US$147 billion Clothing Accessories US$69 billion Hosiery US$51 billion Footwear US$309 billion
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 fashionaligned 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.
Euromonitor International
APPAREL: ADIDAS AG
PASSPORT 2
STRATEGIC EVALUATION COMPETITIVE POSITIONING MARKET ASSESSMENT CATEGORY AND GEOGRAPHIC OPPORTUNITIES BRAND STRATEGY OPERATIONS RECOMMENDATIONS
STRATEGIC EVALUATION
Key company facts

adidas AG Headquarters: Herzogenaurach, Germany Global The company operates in most clothing and footwear categories 1.8% 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$3.8 billion as part of adidas strategy to overhaul Nike; Reeboks brand strength in the US gave adidas a stronger foundation in North America. Other brands include TaylorMade (golf apparel and equipment), Rockport (leather footwear) and Reebok Hockey/CCM (ice hockey apparel and equipment). adidas largest regional market remains domestic Western Europe, which generated 26% of global revenues in 2011. However, Asia Pacific is set to overtake this going forward, generating 24% of value in 2011 compared to 19% in 2006. Although the company lags behind Nike in the key Chinese market, it is the number one brand in India. Like Nike, the company is seeking to extend its retail operations, allowing for improved brand control.
APPAREL: ADIDAS AG PASSPORT 4
Regional involvement:
Category involvement: World apparel value share 2011:
World apparel value growth 2011:
9.4% (at US$ fixed exchange rates)
adidas recovery driven by product and retail development

adidas AG: Total Revenue vs Net Income 2007-2011
16 14 12 Total revenue billion 10 8 6 4 2 0 2007 2008 2009 2010 2011 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Net income billion
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.
Total revenue Source: Company report
Net Income
APPAREL: ADIDAS AG
PASSPORT 5
Two brands underpin segment and retail strength

adidas AG: 2011 Total Revenue by Reported Segment and Growth
3,000 18
16 2,500
14
Total revenue million % growth 2010-2011 2,000 12
Wholesale - sales via third party retail channels remained the largest part of the companys business in 2011, generating 67% of total revenue, down from 67% in 2010. Wholesale was among the more problematic areas of the companys 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 companys other brands, including Rockport and TaylorMade, generated 12% of 2011 sales. The company is developing different brand strategies for each of these.
10
1,500 8 1,000 6 4 500 2 0 Wholesale segment Retail segment Other businesses 0
Total Revenues
% Growth 2010-2011
APPAREL: ADIDAS AG
PASSPORT 6
Latest quarterly data show adidas thriving

adidas AG: Quarterly Total Revenue and Net Income Q1 2011-2012
4 0.4
0.3
0.3 Total revenue billion 3 0.2 Neet income billion
0.2 2 0.1
0.1
1 Q1 2011 Total Revenue Source: Company release Q1 2012
0.0
Net Income
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 Nikes 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.
Controlling the brand in the retail space

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.
Above - Rockport brand store, Mecca
This strategy allows the company far greater control of brand equity across the portfolio, and It is also seeking to develop more shop-within-a-shop the focus on mono-branded operations allows operations with its principal wholesaling partners. adidas each of its brands to maintain a unique identity. aims to generate 45% of total sales from these controlled One of the principal difficulties facing sports space operations by 2015, compared to 36% in 2011. brand producers in the global market is the At the same time, it is also looking to improve its internet huge amount of counterfeit products; operating business, which it seeks to grow to 500 million by 2015. brand stores guarantees the products In 2011, adidas operated online stores in the US, Asia provenance to discerning consumers, as well and Europe, and is seeking to open its first online outlet as being a marketing tool to showcase new in Latin America in 2012 as part of its strategy to add 10 products. Store sites are typically premium new online markets over the year. located, further underpinning brand status.
APPAREL: ADIDAS AG
PASSPORT 8
Social media use supports brand proposition

adidas has been able to develop exceptionally high levels of brand awareness for the adidas and Reebok brands among the consumer base. Sports and nonsports 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 yearold 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.
Above - miCoach,adidas interactive training app
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.
PASSPORT 9
APPAREL: ADIDAS AG
Biggest brands lead global charge

adidas AG: Global Revenue by Brand 2006-2011
14,000
12,000
10,000 million
8,000
6,000 67% 4,000 69% 73% 73% 73% 74%
2,000
0 2006 adidas TaylorMade/adidas golf Reebok/CCM Hockey Note: % figure above shows share generated by adidas brand 2007 2008 2009 Reebok Rockport 2010 2011
The company has identified three attack markets, geographic regions that it is focusing on. These are North America (where Reebok is the companys 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.
PASSPORT 10
APPAREL: ADIDAS AG
Multi brand strategy allows numerous positions

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 Nikes Cole Haan brand are both premium leather footwear brands, adidas Originals are similar to Nikes streetwear/retro Converse brand, and the Five Ten brand is similar to Nikes 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.
Euromonitor International APPAREL: ADIDAS AG PASSPORT 11
SWOT: adidas AG
STRENGTHS WEAKNESSES
Strong brand portfolio
Design competence
Dependence on retailers
Relationship to Nike
The company has an adidas products are well exceptionally strong designed, have a strong group of brands, heavily reputation for aesthetics supported by and function; this sophisticated marketing, underpins brand loyalty that allows the company and response to new to quickly develop new products, despite higher category and prices. geographic markets.
OPPORTUNITIES
Although the company The company lags is developing its behind Nike in scale, controlled space and in many cases in strategy to control retail, terms of innovation; it most sales are still via has a far smaller ethird party retailers. This commerce operation, for risks brand equity. example, than its main rival.
THREATS
Retail growth
Social media
Counterfeit 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.
Endorsement failure Negative behaviour by the athletes and teams that endorse adidas brands could substantially harm brand equity.
The development of its adidas can strengthen own stores, as well as the bond between brand franchises and in-store and consumer with outlets should drive social media and sales as well as support smartphone apps. prices and brand equity, while guaranteeing provenance.
APPAREL: ADIDAS AG
PASSPORT 12
Strategic objectives and challenges

Controlled space in retail 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. Multi brand, multi position 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. Backing the right horse Like Nike, the companys 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.
Relentless product development 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.
APPAREL: ADIDAS AG
PASSPORT 13
Strategic objectives and challenges

Greater fashion/sport crossover 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. Managing production costs 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. Resisting the replicas According to the WTO, fake brands generated US$500 billion a year in sales in Latin America in 2011, equating to 810% 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 inferiorquality imitations will always be a challenge to the companys brand position.
APPAREL: ADIDAS AG
PASSPORT 14
COMPETITIVE POSITIONING
adidas always the bridesmaid

Apparel: Top Global Companies by Value Share 2007-2011 5-year trend in share growth 2011 % share 2.2 1.8 1.0 2007 2008 2009 2010 2011 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 Inditexs Zara.
PASSPORT 16
Company
Nike Inc adidas AG Inditex, Industria de Diseo Textil SA H&M Hennes & Mauritz AB Gap Inc, The Cofra Holding AG Fast Retailing Co Ltd Hanesbrands Inc VF Corp Levi Strauss & Co
1 2 4
1 2 4
1 2 3
1 2 3
1 2 3
5 3 6
5 3 6
5 4 6 7 8
4 5 6 7 8
4 5 6 7 8 9
1.0 0.9 0.6 0.6 0.4 0.4 0.4
13 9 7 8 7 8
10 10 10 9
9 10 10
APPAREL: ADIDAS AG
adidas has started to outperform Nike

adidas has outperformed the global apparel market over the review period; more importantly, it has started to outperform its greatest competitor Nike. adidas AG: Competitive Performance by Value vs Global Apparel Market 2007-2011
% y-o-y growth, US$ fixed exchange rate 18 16 14 12 10 8 6 4 2 0 -2 -4
A B
2007
2008 World
2009 Nike Inc. adidas AG
2010
2011
A: 2007 - The acquisition of

Reebok, completed in January 2006, and double-digit growth in Asia Pacific and Eastern Europe drives growth.
B: 2009-2010 - Plummeting
consumer confidence in Western Europe and North America sees orders from third party retailers decline.
C: 2011 - The companys

marketing, product development and own retail strategies drive growth; North America sees sales development of 14% and 15%, respectively, in 2010 and 2011.
PASSPORT 17
APPAREL: ADIDAS AG
Sports brands seeking ways to build loyalty

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.
adidas and Reebok: Competitive Performance by Value vs Other Leading Sports Brands 2007-2011
30
% y-o-y growth, US$ fixed exchange rate
25
20
15
10
-5
-10
2007
2008
Nike Reebok Converse
2009
2010
adidas Puma Champion
2011
APPAREL: ADIDAS AG
PASSPORT 18
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
Fashion products most dynamic

adidas AG: Apparel Presence and Growth Prospects by Category 2011-2016
6 % CAGR 2011-2016 Men's underwear, 5 nightwear and swimwear 4 3 2 Hosiery 1 Childrenswear Clothing accessories Mens outerwear Womens outerwear
Women's underwear, nightwear and swimwear Footwear
Opportunity Zone
0 100,000 200,000 300,000 Market size 2011 (US$ mn RSP) 400,000 500,000 600,000
Note: Bubble size indicates company share of category in 2011, range displayed: 0.2-5.8%
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, mens outerwear and womens outerwear, the largest global categories and adidas key opportunities.
However, womens products were the most dynamic for the company in 2011, with sales of womens 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.
MARKET ASSESSMENT
Well-balanced global presence

adidas AG: Apparel Presence and Growth Prospects by Region 2011-2016
8 % CAGR 2011-2016 6
Eastern Europe
Asia Pacific
Latin America
4 2 0
Opportunity Zone
Middle East and Africa
Western Europe North America
Australasia
-2 0 100,000 200,000
300,000 Market size 2011 (US$ mn RSP)
400,000
500,000
600,000
Note: Bubble size indicates company share of region in 2011, range displayed: 1.2-2.9%
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.
GEOGRAPHIC AND CATEGORY OPPORTUNITIES
Evolving distribution for different markets

adidas outperformed all of its global markets over the review period with the exception of Latin America. The strength of the companys 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 marketspecific sales models as it seeks to drive harder at controlling retail will be a challenge for the company. adidas AG vs Total Apparel: US$ Million Fixed Exchange Rate, % CAGR 2006-2011
30 26 22 18 14 10 6 2 -2 Asia Pacific Australasia Eastern Europe Latin America Middle East and Africa % CAGR 2006-2011 Total Apparel adidas AG
North America
Western Europe
APPAREL: ADIDAS AG
PASSPORT 24
BRIC economies are lead prospects for adidas

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 companys 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. Most Dynamic Apparel Markets and adidas and Nike Company Shares
140 Constant value growth US$ billion 120 100 80 60 40 20 0 China Russia Brazil India US Canada South Africa Hong Kong, China Ukraine UK 10 8 6 4 2 0 % CAGR growth 2011-2016 and % company share
Absolute Value Growth 2011/2016 - US$ bn
% CAGR 2011-2016
Nike Inc % Company Share
adidas AG % Company Share
APPAREL: ADIDAS AG
PASSPORT 25
adidas needs to pick up the ball in China

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 2008s high, and local manufacturers are increasingly offering a credible alternative to the countrys brandobsessed 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.
Apparel Market Share Development in China of Sports Brand Producers 2006-2011

1.4
1.2
1.0
% share
0.8
0.6
0.4
0.2
0.0 2006 2007 2008 2009 2010 2011
Nike Inc Anta (China) Co Ltd Xtep International Holdings Ltd China Dongxiang Group Co Ltd
adidas AG Li Ning Co Ltd Peak Sport Products Co Ltd
APPAREL: ADIDAS AG
PASSPORT 26
Chinese investment to recapture share

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 Above - adidas billboard in Shanghai. The company seeks to increase its basketball presence to capture share in China. relationship with recreational athletes in China, an According to the company, Greater China increasingly important area of the consumer base. It generated 12% of Wholesale revenue in 2011 sponsors the Beijing Marathon, and is seeking to and 6% of Retail; adidas is seeking to flatten the develop more running sponsorships in smaller cities. difference. Brand control in a market plagued by The company has also sought to increase visibility via counterfeit production is a key reason for this. fitness chains, giving clothing to fitness instructors and buying advertising space in locker rooms and over In 2011, the company opened a number of treadmills. The emphasis is very much on urban stores for its Rockport brand, and already consumers, with smaller cities whose middle-class operates a number of mono-brand adidas consumer bases are less developed a particular priority. outlets. Most store expansion will be of the adidas NEO format. The company also operates However, its key China development strategy appears to be to increase its retail presence, and it aims to open a limited amount of e-sales in the market, via China's biggest web retailer, Taobao.com. Once 2,500 outlets by 2015, most of which will be located in again, sales are limited, but hold high potential. third- and fourth-tier cities.
Indian dominance may be in the balance

Top Five Apparel Producers in India, adidas is the leading apparel company in India with a 1.2% Value Growth in Fixed US$ share of value sales based on its Reebok and adidas Exchange Rate Terms 2006-2011 brands. The Indian apparel market is anticipated to see a CAGR of 5.9% over 2011-2016, and will show the fourth 60 largest growth of all global markets in absolute terms. 40 Growth over the review period has been exponential, with the company generally hitting high double figures. 20 Reebok is the stronger of the two brands with a share of 0 0.7%, based on its dominance of the cricket market; it -20 supplies uniforms to the Indian Premier League, one of the 2007 2008 2009 2010 2011 most dynamic sports franchises in the world, as well as adidas AG Aditya Birla Group equipment, apparel and footwear. Cricket is a national Future Group Bata Ltd obsession, and marketing opportunities are enormous. Raymond Ltd Most importantly, the company had the market largely to The company needs to overcome internal itself in 2011, as Nike has yet to develop a visible problems in India; in May 2012, the company presence, despite manufacturing in the country (and also asked the Indian authorities to launch a supplying the uniform for Indias 2011 Cricket World Cupcriminal probe into unspecified commercial winning team). irregularities at Reebok India. Nonetheless, a booming middle class and the second largest However, adidas may be on the point of jeopardising its consumer base in the world offer great success in India. At a time when the Indian government potential, and the company may instead build has indicated it may greatly liberalise foreign direct retail sales via more NEO stores. This could investment in the retail market, adidas announced plans in help develop clothing sales, which generated May 2012 to close a third of its 1,000 Reebok stores in just 20% of revenue in 2011. India
Euromonitor International APPAREL: ADIDAS AG % y-o-y growth, US$ fixed exchange rate PASSPORT 28
Russian strength underpins regional dynamism

Russia and Ukraine have consistently generated the companys 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 companys 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.
adidas AG: Apparel Presence and Growth Prospects in Eastern Europe 2011-2016
10 8 Ukraine % CAGR 2011-2016 6 4 2 0 -2 Czech Republic -4 -20,000 0 20,000 40,000 60,000 Market size 2011 (US$ mn RSP) Romania Poland Hungary
Opportunity Zone
Russia
80,000
100,000
Note: Bubble size indicates company share of country in 2011, range displayed: 0.6-2.1%
The company has significant promotional opportunities going forward in these markets - Ukraine is set to cohost 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.
APPAREL: ADIDAS AG
PASSPORT 29
adidas bucks apparel trends in North America

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 companys 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. adidas AG: Competitive Performance by Value vs North American Apparel Market 2006-2011
% y-o-y growth, US$ fixed exchange rate 20 15 10 5 0 -5 -10 2006-2007 2007-2008 North America 2008-2009 adidas AG Nike Inc 2009-2010 2010-2011
APPAREL: ADIDAS AG
PASSPORT 30
UK a key marketing arena for adidas

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 companys 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 companys reputation as an innovator.
Above - Stella McCartney UK Olympic uniform launch, 2012.
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.
PASSPORT 31
APPAREL: ADIDAS AG
adidas NEO a step in a new direction

adidas is primarily a sportswear brand; although many of the brands 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.
Euromonitor International APPAREL: ADIDAS AG
Above - NEO flagship store, Hamburg
PASSPORT 32
Womens categories show promise

Some of the companys most dynamic growth over the review period has come from womens products. In total, womens 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 mens 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. Womens clothing is forecast to generate a CAGR of 3% in the global market over the forecast period compared to 2.6% for mens. The companys 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 womens training collection, and the adidas by Stella McCartney gym collection. The company believes that the womens segment offers long-term potential, and the ongoing fusion of sports and lifestyles will inform product development for women over the forecast period.
Above - part of the adidas by Stella McCartney 2012 collection.
PASSPORT 33
Growing demand for functional apparel

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 companys 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 companys Speed_Cell technology and allows users to track the foots 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 companys 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.
Above - Barcelona player Lionel Messi and Chicago Bulls star Derrick Rose with the adizero products they endorse.
PASSPORT 34
BRAND STRATEGY
Well-balanced brand portfolio

adidas AG: Global Apparel Value Sales by Brand 2011 The adidas brand is by some considerable distance the companys 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 companys other brands, including Rockport and Five Ten have very limited market share outside North America. The companys focus on adidas makes operational sense, as it simplifies and reduces the cost of marketing. However, there is little conflict between the companys 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.
adidas
Reebok
Other Brands
BRAND STRATEGY
Segmentation allows consumer-specific marketing

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 companys 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. Reeboks fitness position means that innovation tends to be led more by improving performance levels, although in reality these innovation advances are not brand exclusive.
APPAREL: ADIDAS AG
PASSPORT 37
BRAND STRATEGY
Segmentation clearest in adidas Sport Style

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 P5000 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 P5000, Neo, adidas SLVR., Y-3 Yohji Yamamoto.
APPAREL: ADIDAS AG
PASSPORT 38
BRAND STRATEGY
Focus on consumer-specific marketing

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 companys 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. Reeboks fitness position means that innovation tends to be led more by improving performance levels, although in reality these innovation advances are not brand exclusive.
Above - the company operates different logos for its adidas Sport Performance and adidas SportsStyle products.
APPAREL: ADIDAS AG
PASSPORT 39
BRAND STRATEGY
adidas brand ambassadors support image building

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 brands 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 Nikes 7.9%
Top to bottom - logos for adidas Sport Performance, adidas Sport Style and adidas Originals
PASSPORT 40
OPERATIONS
adidas AG global operations

Manufacturing adidas AG is headquartered in Herzogenaurach, Germany. Almost all of the companys 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 companys push into new markets as well as new sourcing markets such as Cambodia. China was the companys 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.
APPAREL: ADIDAS AG
PASSPORT 42
RECOMMENDATIONS
Key recommendations: focus on retail and fashion

Recover China initiative 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 rollout of stores will also help. More retail 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.
Further acquisition 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.
Push harder at fashion The companys adidas NEO concept and the rollout 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.
APPAREL: ADIDAS AG
PASSPORT 44
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PASSPORT 45

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ADIDAS AG IN APPAREL (WORLD)

SCOPE OF THE REPORT

Apparel US$1,668 billion

Key company facts

World apparel value growth 2011:

9.4% (at US$ fixed exchange rates)

adidas recovery driven by product and retail development

Total revenue Source: Company report

Two brands underpin segment and retail strength

Latest quarterly data show adidas thriving

0.3 Total revenue billion 3 0.2 Neet income billion

1 Q1 2011 Total Revenue Source: Company release Q1 2012

Controlling the brand in the retail space

Social media use supports brand proposition

Above - miCoach,adidas interactive training app

Biggest brands lead global charge

6,000 67% 4,000 69% 73% 73% 73% 74%

Multi brand strategy allows numerous positions

Strong brand portfolio

Strategic objectives and challenges

Strategic objectives and challenges

adidas always the bridesmaid

1.0 0.9 0.6 0.6 0.4 0.4 0.4

adidas has started to outperform Nike

2009 Nike Inc. adidas AG

A: 2007 - The acquisition of

C: 2011 - The companys

Sports brands seeking ways to build loyalty

% y-o-y growth, US$ fixed exchange rate

Strengthening presence in emerging markets

Market leadership Nike adidas

Fashion products most dynamic

Women's underwear, nightwear and swimwear Footwear

Well-balanced global presence

Middle East and Africa

Western Europe North America

300,000 Market size 2011 (US$ mn RSP)

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Evolving distribution for different markets

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

BRIC economies are lead prospects for adidas

Absolute Value Growth 2011/2016 - US$ bn

Nike Inc % Company Share

adidas AG % Company Share

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

adidas needs to pick up the ball in China

Apparel Market Share Development in China of Sports Brand Producers 2006-2011

0.0 2006 2007 2008 2009 2010 2011

adidas AG Li Ning Co Ltd Peak Sport Products Co Ltd

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Chinese investment to recapture share

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Indian dominance may be in the balance

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Russian strength underpins regional dynamism

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

adidas bucks apparel trends in North America

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

UK a key marketing arena for adidas

Above - Stella McCartney UK Olympic uniform launch, 2012.