In November 2010 adidas unveiled a business plan that the brand hoped would make it the biggest sports manufacturing company in the world by 2015. Called Route 2015, the plan aimed to grow adidas Group business by between 45-50 per cent by 2015 to €17billion.
Based on the group’s strong brands, premium products, extensive global presence and its commitment to innovation and the consumer, adidas aspired to outperform total market growth (both GDP and the sporting goods market) and to continue growing its bottom line faster than its top line.
In addition, the group planed to lay the foundation for leadership in the sporting goods industry by outgrowing its major competitor, Nike, in the next five years. Adidas targeted a compound annual earnings growth rate of 15% and wanted to reach an operating margin of 11% sustainably by 2015 at the latest.
At the time the strategic business plan was the most comprehensive plan that adidas had ever presented.
4 Years on
Roll forward to 2014, nearly four years into the five year initiative, and things aren’t quite going to plan..
2014 announcements see gross margins forecast to decrease to a level between 48.5% and 49.0%, having previously been between 49.5% to 49.8% and operating margin to be at a level between 6.5% and 7.0%; previously it was between 8.5% and 9.0%
Projected earnings were reduced to €650 million after the German company had expected profits of between €830 and 930 million.
So whats gone wrong?
Its clear that the challenging golf market (massive declines in participation at the expense of the “MAMILs”(Middle Aged Men in Lycra creating a cycling boom) has not helped the Taylor Made side of the business and, likewise, the problems in Russia and other former Soviet republics as problematic.
However some commentators are suggesting that these broad issues hide a more fundamental shift in the attitude of the brand towards its retail partners and a lack of focus on its R&D and marketing initiatives.
The move towards more direct sale business (through online and mono stores) has put them in direct conflict with their core retail partners – one only has to look at the Chelsea shirt issue with Sports Direct – as well as opening the battle grounds on selective distribution.
At present it appears that both of these battles are being lost leaving Chief executive Herbert Hainer vowing to unleash Adidas’ “most ambitious” brand campaign to date, with an increasing focus on digital media spend.
It is true that Adidas has confirmed it plans to boost its marketing investment to about 13% of sales in 2014 and to 13% to 14% in 2015, however anecdotal evidence, certainly from the UK/European market, suggests that some retail sentiment has been lost over the past few years and that increased spend alone will not kick-start the targeted growth.
Nike, meanwhile, continue to go from strength to strength with first quarter revenues up 15% year on year and a rising share prices that underlines stock market and, arguably, sports market confidence.
A successful World Cup campaign for the brand has helped bolster confidence versus its German rival and has further compounded the issues that adidas faces versus its stated Route to 2015 objectives.
Under Armour too continue to mount a global challenge and, particularly in apparel, may begin to fill the hole that adidas may be leaving.
Its too early to say that there is a changing of the guard particularly as, perhaps, the biggest question facing the “mega brands” is the speed at which market change is occurring and the shift from wholesaling to own brand strategies.
One only has to visit the Sports Direct Shirebrook store to see the investment that Nike have made in trade support. In contrast adidas appear as the poor relation. If, across Europe, the strategy is similar then it is clear who the short term winner will be.
However lets look forward 5,8,10 years. Will it be the wholesale or the direct sale business which will be the driver for sports brands.
Certainly the Asian and emerging Russian markets are driven by the latter approach – will we see a shift West as these strategies demonstrate increased brand control and increased margins.
To drive a global strategy for direct sales is relatively straightforward. To drive a global wholesale strategy, when you consider the effect of ecommerce and the emerging European/Global retailers, is more complicated.
With no major sporting events in 2015 the marketing efforts of the major brands and, perhaps more importantly, the co-operative support that they provide, is likely to be the difference between adidas moving either closer or further away from their development goals.
Adidas management have already admitted that the group is not on track for its business plan called “Route 2015″ and that these targets will be met “later than expected”.
It remains to be seen when, or if, that day will arrive.