Turnaround moves Adidas Shows its Stripes

The sports goods company, which is streamlining its business to focus on shoes, has moved to sell off its golf division and buy a fitness app producer just as it introduces its latest innovation – tailor-made sneakers.
Teed off? Adidas is exploring the option of selling its golf brand Taylormade.

Adidas, the world’s second-biggest sports shoe maker, has engaged an investment bank to explore the possibility of selling its golf operations.

The announcement came as the German firm, which has experienced a sales stagnation in recent years, revealed it had bought sports app producer Runtastic for €220 million, or $240 million. Both moves are in line with the company's bid to restructure its business to concentrate on sports shoes and fight off rivals Nike and Under Armour.

In a statement on Thursday, Adidas, known for its three stripes logo, said it had started a “major turnaround plan for its golf business.”

“In addition, the Adidas Group has engaged with an investment bank for the purpose of analyzing future options for the company’s golf business, in particular the Adams and Ashworth brands,” it said.

Golf sales fell 26 percent to €239 million in the second quarter this year, making up 6 percent of total quarterly sales of €3.9 billion.

The firm was considering all options, including the possible sale of leading golf brand TaylorMade or smaller brands Adams and Ashworth, an Adidas spokesman told Reuters.

Runtastic, founded in Austria in 2009, is a neat fit with Adidas' turnaround strategy, called "Creating the New." It has produced more than 20 health and fitness apps, for example to monitor running performance, and has 70 million registered users. Its largest shareholder was Axel Springer, the German media giant.

Adidas, based near Nuremberg in southern Germany, acquired TaylorMade in 1997 when it bought French sportswear maker Salomon, and purchased the Ashworth and Adams brands in the past decade. However, declining golf equipment sales, especially in the United States, have been a drag on Adidas’s profit in recent quarters, forcing it to issue several profit warnings last year.

Golf sales fell 26 percent to €239 million in the second quarter this year, making up 6 percent of total quarterly sales of €3.9 billion, Adidas said. Its group gross profit margin fell, mainly due to lower margins at its golf business.

Overall, the company’s results were in line with market expectations. It shares rose as much as 2.6 percent and were up 0.9 percent on the Frankfurt Stock Exchange by 10:35 CET .

 

Adidas wants to focus on its core business - shoes.

 

Meanwhile, the king of off-the-shelf sports shoes has announced it is going tailor made. In two years’ time, Adidas plans to sell moldable sneakers that can be fitted in store.

Under the plans, buyers’ feet will be measured using high-tech devices and then their chosen shoe will be immediately formed for them to take home.

“Customers will receive shoes that are exactly matched to their needs and perfectly fit their feet and their pattern of movement,” said management board member Glenn Bennett, who is in charge of procurement.

The company is calling the project “Store Factory,” and hopes it will usher in a new era in sporting goods sales. As well as increasing revenues, it hopes the plans will help to build a closer relationship with consumers.

“We will get to know our customers better than ever before,” said Mr. Bennett.

 

Asia Dominates-01

 

The big sporting goods brands have traditionally produced their products in giant factories in Asia. That is cost-effective, but has a disadvantage: Firms must plan a long time in advance. This often means they run out of their top sellers and are left with a mountain of unpopular products that can only be shifted with hefty discounts.

Part-producing goods in store may help to remedy this and Adidas thinks the method could also be applied to other products. In the future clothing will also be produced in its stores, “which will fit the buyers perfectly and will look exactly like they want it to,” said Mr. Bennett.

There is a reason why Adidas is experimenting with new directions. Herbert Hainer, the company’s chief executive, pledged in spring to increase sales by 9 percent year-on-year and profits by 15 percent by 2020.

We lost desirability, because we did not concentrate enough on the needs of our customers. Herbert Hainer, CEO, Adidas

In order to reach those goals, Adidas wants to be quicker, more urban, and open to new ideas, hence the launch of the "Creating the New" strategy.

Store Factory is an important component of the strategy, and to make it work, Adidas is closely integrating its suppliers, such as machine builders and raw material producers.

Another strand of the strategy, “Speed Factory,” a highly automized process for the production of shoes, will soon be tested out. If the assembly line stands up, it could be set up all over the world in the future. “Adidas is growing, and as such we need additional capacities,” said Mr. Bennett.

Rising production costs in Asia mean that such innovations are sorely needed. Even China has long ceased to be attractive as a production location. Wages there are rising by double digits every year, and factories have long lead and shipping times.

Adidas needs new momentum to make its investors happy. The past two years were a disappointment for stockholders. The company fell far short of its own goals. “We were not as good as we had hoped,” Mr. Hainer said. “We lost desirability, because we did not concentrate enough on the needs of our customers.” In 2014, Adidas was among the weakest prices on the DAX index of leading German public companies.

 

Adidas CEO Herbert Hainer will be spending more time on the golf course when he steps down in 2017.

 

Impressing customers with new innovations is most easily done in the brand’s own stores, because the company has full access there. In the future, Adidas wants to bring in more than 60 percent of sales from stores it controls; to date the figure stands at 50 percent. This makes sense as margins in the brand’s own stores are also higher.

Europe’s largest sports shoe producer is also under a lot of pressure from rivals, especially global market leader Nike. “Nike continues to develop very positively,” said Jochen Schnell, a management board member at Intersport, Germany’s leading sporting goods chain.

Ten years ago, the U.S. company targeted having about €6 billion ($6.5 billion) more in sales per year than Adidas. Since then, it has become €12 billion.

Nike is also expanding, and considering producing goods closer to customers. The company could create up to 10,000 jobs in its home state of Oregon, CEO Mark Parker said this spring.

But he warned this would only happen if the proposed Trans Pacific Free Trade Agreement between the United States and Asian-Pacific countries were signed. If duties go down, there would be so much capacity for innovation that Nike could produce on a large scale at home for the first time, he said.

If Adidas wants to avoid relegation to the second league, it must quickly gain momentum. However, for the moment, its mini-factories are only likely to supplement large-scale production in Asia.

 

Video: How Adidas makes its shoes.

 

Gilbert Kreijger is an editor covering companies and markets at Handelsblatt Global Edition in Berlin, Joachim Hofer covers the high-tech industry and outdoor- and recreational-industry for Handelsblatt. To contact the authors: [email protected][email protected]