Adidas Spending The Price of US Success

It's become fashionable to wear Adidas in the US again, which is Nike's home turf. But due to heavy marketing costs, America will not become an instant cash cow.
Quelle: Getty Images
Trying to grow on Nike's home turf.

During his decade and a half at the helm of German sportswear maker Adidas, Herbert Hainer never realized his dream of becoming the US market leader. His successor, Kasper Rorsted, has reason to celebrate after just a few months taking over: the top-selling sports shoe in the United States last year came from Adidas. Its "Superstars" retro sneakers, a new version of the brand's classic leather shoe in white with black stripes, beat other designs from US archrival Nike.

The good news continued this year. Adidas' North American sales soared by more than one-third to €988 million ($1,085 million) in the first quarter, the German maker of sport shoes, running gear and t-shirts said Thursday. No other major sports brand grew as strong in the region between January and March.

"We gained market share in North America," Mr. Rorsted, 50, emphasized during a telephone conference on Thursday. Nike's sales in the region have most recently grown by just 3 percent. What's more, the brand known for its three stripes has overtaken Under Armour, an ambitious Baltimore-based brand that had temporarily displaced the German group from second place on the US sports goods market. Under Armour's domestic sales contracted to about €800 million in the first three months of the year.

Adidas' profits are significantly lower in the United States than in other regions.

Adidas' US success is of enormous importance to the group, partly because consumers there spend more on sports equipment than anywhere else in the world, and also because Adidas, the world's second-biggest manufacturer of sports gear after Nike, has not had a sufficient presence in American sports stores to date. Moreover, the Americans tend to be trendsetters in global sports business.

Mr. Rorsted, who took the helm in October, has made it a key priority to grow in the United States, where Nike still dominates. Without significant growth on the US market, it will be difficult for Adidas to close the gap to Nike, which has beaten the German sports gear maker in terms of sales and profitability for years.

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For this reason, Adidas had already begun increasing its sales efforts on the American market in 2014 and its campaigns have paid off. Nowadays, it's impossible to imagine America's street scene without Adidas' three-stripe logo. Within just a few years, the Herzogenaurach-based company has managed to attain cult status in the United States, with fashion bloggers already talking about an epidemic of Adidas' "Superstars".

Yet the group's US success has been anything but easy. In its almost 70-year history, it has never really achieved a breakthrough in the region; business has fluctuated, with sales reaching €890 million in the first quarter of 2013, only to drop to €680 million a year later.

That was the point at which Herbert Hainer announced plans for a comeback, saying that it was time to design products more suited to US customers' tastes. Since then, the group's head of design has been based in the United States; a new, hip branch office has opened in Brooklyn, and Mr. Hainer has lured away creatives from Nike. Adidas has also signed contracts with numerous up-and-coming sports stars in the American sports of basketball, American football and baseball.

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More importantly, Adidas has pumped many millions of dollars into US advertising over the last two years, locked down new supplier contracts, expanded its logistics centers and even built its own highly automated factory in Atlanta, the "Speed Factory." It all seems to have paid off. Adidas has succeeded in reaching not only women, but also the coveted target group of "yummies" (young urban males) in the United States. Some are willing to pay over €1,000 for a genuine limited-edition "Yeezy" shoe designed by rapper Kanye West for Adidas. The same applies to shoes created by singer Pharrell Williams.

Meanwhile, the group's "Boost" technology, developed by German chemicals giant BASF, has proved a hit with athletes. The specialist magazine Sports Illustrated recently tested various running shoes in marathons, half-marathons and 10-kilometer runs, and awarded first prize to Adidas' "Ultraboost." The German company also recently opened a new flagship store on 5th Avenue in Manhattan, its biggest outlet worldwide.

However, this offensive has come at a price. Adidas reported expenses of €294 million for operating activities in North America in the first quarter, only about €60 million less than the figure for Europe, even though sales there are 50 percent higher. The company has attributed this in particular to sales campaigns in stores.

As a result, Adidas' profits are significantly lower in the United States than in other regions. The group achieved an operating profit of €97 million in the first quarter, equating to a margin of 9.8 percent. In China, where the group's sales were almost as high, operating profit totaled €396 million and the margin was thus almost 40 percent. Only the Russian market was less profitable than the North American region.

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This is not set to change any time soon, as Adidas still has a long way to go in America, where it has also been struggling to make its Reebok brand successful. Nike still has a market share of over 50 percent for shoes, while generous estimates put Adidas' share at 20 percent. Furthermore, Nike generates about 45 percent of its total sales on the world's biggest sports market; for Adidas, this figure is less than 20 percent. The difference in absolute figures is also huge: Nike most recently achieved quarterly sales of the equivalent of almost €3.5 billion on its domestic market, while Adidas would need almost a year to reach this sum.

Mr. Rorsted recently announced his intention to "continue investing disproportionately in US business," adding: "We want to win the battle in North America." Within the company itself, long-standing employees in particular are skeptical regarding the sudden success in the United States. Inside sources highlight that the company has too often had high hopes for the US market that have then been disappointed. Mr. Rorsted has therefore been careful not to talk about a breakthrough, instead emphasizing the importance of securing long-term consumer loyalty to the brand.

The stock market was nevertheless enthusiastic about the group's progress in America. Adidas shares were up around 1 percent on Thursday, which is particularly remarkable as they have already increased in value by one-fifth since the beginning of the year and have gained around 60 percent within the last 12 months. Baader Bank analyst Volker Bosse said the group had made an excellent start to the year.

Meanwhile, Nike will probably get over the fact that an Adidas sneaker topped the best-seller list last year, as the nine remaining models in the top ten were all Nike designs.

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Joachim Hofer covers the sports, leisure and IT sectors for Handelsblatt. To contact the author: [email protected]