Adios Adidas Running Behind the Pack

Longstanding Adidas chief executive Herbert Hainer is struggling to keep up with his biggest competitor, Nike. His decision to acquire Reebok has proved to be a serious mistake
CEO Hainer needs to get his hands around a winning strategy.

Rumors abound about aggressive hedge funds trying to push their way into the German athletic apparel and accessories maker, with its famous three-stripes logo. Investors are bidding for Reebok, the U.S. subsidiary brand with which Mr. Hainer had in fact intended to compete directly with American competitor Nike in its home market.

In the United States, the world's largest sporting goods market, Adidas has slipped to third place in retail sales behind archrival Nike and relative newcomer Under Armour. Instead of catching up to world market leader Nike, Adidas is falling further behind.

This summer, after a long battle, Mr. Hainer officially abandoned the goal of increasing sales from €12 billion ($15 billion) to €17 billion between 2010 and 2015 and conceded he had made mistakes.

For years, industry insiders say, Mr. Hainer was fixated on sales. That focus led to consistent revenue growth of 8 percent a year on average, with revenues reaching €14.5 billion in 2013 – compared to €6 billion when he came into office. At the same time, however, the company's operating margin declined "dramatically" between 2004 and 2013, said fund manager Ingo Speich with Union Investment.

The best managers aren’t the ones who have a lot of ideas; they're the ones who take one or two ideas and implement them uncompromisingly. Herbert Hainer, Chief Executive of Adidas

Mr. Hainer also comes up short on innovation. According to Grünecker, a Munich-based law firm specializing in intellectual property, Adidas has fallen behind Nike in new patent applications, due partly to different strategies in filing applications: the U.S. rival generally files an application for "every single design model."

"The trend is clear, with Nike ahead by a long shot, be it in sports equipment, clothing, shoes or polymer processing," said Ulrich Blumenröder with Grünecker. "The German sporting goods industry will have a hard time competing with Nike in the European market, given the edge it has created for itself with its patents."

Mr. Hainer, a native of lower Bavaria, is a salesman through and through. When he joined the company in the spring of 1987, he brought along eight years of experience with consumer products giant Procter & Gamble. After taking the helm at Adidas, he embarked on a push into more international markets. Together with his chief of marketing, Erich Stamminger, he decided to establish Adidas as a fashion brand, introducing classic sneakers designed to be worn on the street.

At the same time, Mr. Hainer learned from rival Nike and invested heavily in advertising. The concept worked at first, with fashion and sporting goods driving sales. But the reality is that neither he nor Mr. Stamminger established a true relationship with the creative part of their business."The best managers aren’t the ones who have a lot of ideas," Mr. Hainer once said. "They're the ones who take one or two ideas and implement them uncompromisingly."

But what if those ideas are unsuccessful? In 2005, Mr. Hainer and Mr. Stamminger decided to sell the company’s Salomon winter sports division and, just two months later, announced acquired U.S. brand Reebok – moves that would eventually put a serious dent in their halo.The goal was clear: To attack Nike on its home turf, where it controlled 35 percent of the athletic shoe market. "In the long run, I don't think the markets will allow one player to remain so dominant," Mr. Hainer said.

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It was a serious mistake that would hound the CEO to this day, no matter how much he increased Adidas sales after the Reebok acquisition. Only now, eight years later and after numerous upper management shakeups at Reebok, is he finally seeing some growth at the U.S. subsidiary.

But the energy Mr. Hainer expended on Reebok has been absent elsewhere. While he was saving Reebok, Nike, under its new CEO Mark Parker, turned up the heat in the United States. Together, Nike and sister brand Jordan now hold a 60-percent share of the U.S. retail market.

In contrast, Mr. Hainer has had to confront a decline in Adidas's U.S. market share from 10 percent in 2005 to 6 percent today. And Reebok’s market share, the brand he had hoped to use as a weapon against Nike, has dropped from 8 percent to only 1.8 percent today. Instead of the €3 billion in revenues forecast in the 2010 business plan, Mr. Hainer now hopes to earn €2 billion with Reebok in 2015.

He is trying to make up for the shortfall by depending on his golf division, TaylorMade, to rake in €2.2 billion in sales by 2015 instead of €1.8 billion. To reach that goal, say insiders, Mr. Hainer is sending as much product as possible to stores. The problem is that no one wants to buy the products.

Adidas is especially weak among young consumers.

Retail managers who have known Mr. Hainer for a long time are convinced he is notabout to give up, but in fact will do everything he can to stick it to his critics."Herbert is a tough dog," one industry insider said. "He's tenacious."

Yet he knows he needs help. He has transferred most of the burden to Eric Liedtke, a 48-year-old American formerly in charge of shoes and apparel for performance athletes. Mr. Liedtke has recognized the company's weaknesses and installed a global creative director, Paul Gaudio, and plans to hire three new top designers.

Adidas is especially weak among young consumers. In a recently published ranking by Hamburg-based brand consulting firm Brandmeyer, Adidas tops the list of Germany's most popular brands, ahead of BMW and Nike. But the picture changes completely among young people, with only 5 percent of 14- to 17-year-olds naming Adidas as their favorite brand.

The shirts and shoes the new people in charge at Adidas are now dreaming up won't translate into higher sales and profits until 2016 or later. Until then, Mr. Hainer is trying to boost sales with more advertising. In 2015 he aims to launch the biggest ad campaign in the company’s history. But his plan will only work if the supervisory board cooperates.

The supervisory board is hand-picked and considered relatively tame. But there have been rumblings from those who want the company to start searching for a successor to the eternal Herbert. Apparently nothing has come of it so far, although some supervisory board members say it's "about time."

 

Peter Steinkirchner reports on media, marketing and brand articles for Wirtschaftswoche. To contact the author: [email protected]