Here’s How Adidas’ New CEO Could Chase Down Nike
Steve’s breakdown: One of the ways this article from Fortune sights is making “advertising more efficient”. Of course one way to do that is with better creative. We think our friends at 72andSunny are doing okay work but there’s room for improvement.
PORTLAND, OR: Adidas has already started to chip away at Nike’s dominance in the U.S. market.
Closing the gap on clear market leader Nike is the challenge facing new Adidas boss Kasper Rorsted when the Dane takes charge of the world’s second biggest sportswear brand from the start of October.
Investors are banking on Rorsted, 54, repeating improvements to profitability he achieved at consumer goods maker Henkel and the Adidas ADDYY 1.27% share price has risen by around two thirds since his appointment was announced in January.
Ingo Speich, a fund manager at Adidas shareholder Union Investment, said he hopes Rorsted will scrutinise the Adidas product portfolio and its sales structure as the first steps to boosting lagging margins.
“I expect small measures rather than a bombshell. But in 12-18 months, if the margin is still where it is now it will be difficult for the shares,” said Speich, a critic of outgoing Adidas Chief Executive Herbert Hainer.
Rorsted’s performance at Henkel, the maker of Schwarzkopf shampoo and Loctite glue, is being examined for clues as to what he will do at the sportswear group which supplies soccer jerseys to Manchester United and world champions Germany.
At Henkel, Rorsted culled 80% of the firm’s brands, pushing top names such as Persil at the expense of local labels. He also kept a tight control on costs, shifting some head office functions to “shared service” centers in lower-wage countries.
Investors also want Rorsted, who earlier in his career worked for U.S. firms Compaq and Hewlett Packard, to maintain the focus on reviving the Adidas brand in the United States. The Dane spent a lot of time there in the last few years as he overhauled Henkel’s U.S. business.
Adidas has started to chip away at Nike’s dominance in the U.S. market thanks to heavy marketing spending and collaborations with singers such as Kanye West and Pharrell Williams as well as top sports stars.
One investor said their research suggests a rebound in the Adidas brand has been limited to the lifestyle segment in the biggest U.S. cities so far and it still has work to do in the rest of the market and in performance sports.
A quarterly earnings report from Nike this week showed it was feeling the effects of increasing competition from Adidas and Under Armour.
Nike’s entrenched strength in its home U.S. market helps explain much of its advantage over its German rival in profitability.
It is also what drove Hainer to buy Reebok in 2005 for $3.8 billion, but the strategy backfired as the brand has since floundered, with some investors keen for it to be sold.
Hainer, a Bavarian who is a supervisory board member of German soccer champions Bayern Munich, has been chief executive since 2001.
His critics say he failed to improve profitability even as sales rose by two thirds in a decade. The operating margin was stuck at 6.3% in 2015 versus 14% at Nike.
Some investors hope Rorsted will scale back new store plans to be more like Nike, which focuses on flagship stores in top locations combined with e-commerce.
Adidas had 2,722 stores at the end of last year and plans to add another 500-600 by 2020 and quadruple e-commerce sales to $2.2 billion by then. Nike is more ambitious — targeting $12.5 billion from e-commerce by then.
Rorsted, who formally takes charge on Oct. 1 after shadowing Hainer since August, was chosen after new investors including Egyptian tycoon Nasser Sawiris, Southeastern Asset Management founder Mason Hawkins and Belgian billionaire Albert Frere bought stakes in the company last year.
Sawiris and a representative of Frere have since taken seats on the Adidas board. Sawiris and Hawkins have also set up Southeastern Concentrated Value (SCV), a vehicle to spur boardroom change and influence strategy at firms they invest in.
“We believe there is a lot of low-hanging fruit that Mr. Rorsted can address to get to that 10-11% range. Approaching Nike is going to take some more work and heavy lifting,” said Scott Cobb, a managing partner at SCV.
Hainer, stepping down at age 62, has already started harvesting some of that fruit — announcing plans to sell the loss-making golf business and improving the U.S. business after Adidas fell into third place behind Under Armour in 2014.
Investors expect Rorsted to draw on his Henkel experience to make sourcing, logistics and advertising more efficient, although the spiraling cost of top sports sponsorships means it will be hard to bring down marketing spending.
One way to boost efficiency would be to further simplify the product range. Adidas already plans to cut the number of different models by a quarter by 2020 to focus on top sellers like retro Superstars and UltraBoost running shoes.
Some investors want Rorsted, who played handball on the Danish youth team and is a keen skiier and mountain biker, to consider selling Reebok.
“Reebok needs to be closely monitored and perhaps reexamined. Reebok waters down margins for the whole company,” said Tim Albrecht, a fund manager at Deutsche Asset Management, a top 10 shareholder in Adidas.
Hainer has repeatedly ruled out selling Reebok, saying now it has been revamped, the brand is well positioned to benefit from booming participation in fitness.
Bankhaus Lampe analyst Peter Steiner said a sale could be harder than it might seem as Reebok has become very intertwined with Adidas.
He puts a 30% chance on a sale of the business, which he estimates is worth around €2 billion, potentially attracting interest from rivals like VF Corp or Asian sportswear firms.
Rorsted gets his first opportunity to speak in public at third-quarter results on Nov. 3, but analysts only expect substantive comments at full-year figures in March.