Adidas Case Study Essay
Adidas Case Study
Adidas was the dominating manufacturer of sporting goods. It achieved this success by developing cleated shoes for the soccer and track and field sports. The landscape of the sporting goods industry has changes, but Adidas has not changed with it. Sporting good textiles and footwear have become popular with younger individuals as a substitute for casual wear. Soccer and track and field sports are no longer the mainstream sports. These sports have been replaced in market share by sports such as baseball, basketball, football, and fitness activities like aerobics. Adidas has not developed the marketing mix to compete in these sports and fitness activities. The participation by women in these sports is growing, yet Adidas has neglected this market by remaining a preferred supplier of sporting equipment to the middle aged male population.
Nike and Reebok are two very aggressive marketing companies with the appropriate marketing mixes for today’s sporting goods markets. Both have surpassed Adidas in sales during the past decade. If Adidas is to regain its lead in the sporting goods industry it must stop living in the past, develop a marketing mix that supports the current market trends, and drop its old style of promotional advertising for a more favorable endorsement approach currently being used by its competitors. Europe has been Adidas’s primary playing field, but America is, by far, the largest market. Adidas must restructure its company and cut overhead costs to compete in the United States.
It is 1993 and the Adidas Sporting Goods Company is bankrupt. Since its inception in the 1920s, Adidas monopolized the sporting goods industry until the 1970s. During this time fierce competition emerged from rival companies like Nike and Reebok. In fact, both Nike and Reebok at the time of the case writing had taken the lead in market share over Adidas. Management of the Adidas Company is in disarray and the Company’s new creditors have turned to Robert Louis-Dreyfus for help in turning the company around.
External Environment Analysis
Several trends are emerging at the time of this case writing that are reshaping the playing field in the sporting goods industry. The demographics of the industry are changing. Until the late 80s the demographics of the sporting goods industry consisted largely of males. The case study suggests that the early 90s have shown trends of considerable growth in the female population in terms of interest in sports and sporting goods, but no empirical data was presented in the case writing to support this statement.
American and European cultures have seen the rise of the fast food industry and fast lifestyle, creating a need for fitness activity to relieve stress and stay healthy. This fitness trend has increased popularity of activities such as walking, hiking, jogging, and aerobics that are for average people with a desire to exercise and have fun. These leisure fitness activities made up the largest portion of the sporting goods industry with 55% of the athletic shoe market in 1992. In contrast, a 4% market share existed in 1992 for sports like soccer, which require the cleated/studded type shoe. The cleated shoe gave Adidas its initial foundation and leadership position, but the cleated shoe is not the key to being competitive in Adidas’s current environment. A trend of wearing sports apparel, both footwear and textiles, for everyday leisure types of activities was emerging in the early 1990s. This trend was primarily seen in the 25 and under age group.
Adidas is a German based company with its largest market share in Europe; therefore, the exchange rates between Germany and the U.S. should also be considered in the analysis of the external environment facing the company. At the time of the case writing, the exchange rates for Adidas were favorable. U.S. goods were expensive to German consumers, which probably encouraged many German citizens to seek Adidas products versus U.S. products that were more expensive. Likewise, German goods were cheaper for U.S. customers, which should have stimulated the export market in favor of Germany and Adidas.
The sporting goods industry consists of three segments: athletic footwear, apparel, and equipment. Athletic footwear makes up 33% of the sporting goods industry, apparel 50%, and equipment makes up the remaining market share. The three largest markets for athletic equipment are the U.S. at 50% of the market share, Western Europe at 25% of the market share, and Japan at 10% market share.
An industry that had one primary market segment consisting of the serious male soccer and track athlete has now separated into several market segments containing the professional athlete, the amateur athlete, the fitness group (aerobics and cross-training), and the mass consumer who is not interested in athletics but enjoys the comfort of wearing athletic apparel.
Barriers to Entry
The footwear-manufacturing segment has the highest barriers to entry out of the three sporting good industry segments. In the U.S. 53% of the footwear market share is controlled by two companies- Nike and Reebok. Adidas came in at 7th place with only 4% of the U.S. market share. The competition in the industry is fierce, requiring a substantial investment in marketing to establish a successful brand. Research and development expenses are high requiring a substantial investment to develop a shoe that could provide the necessary level of comfort to compete with companies like Nike and Reebok.
For athletic and fitness activities, few substitutes exist for athletic footwear. Substitutes do exist for athletic footwear and apparel in the leisure markets. For example, an individual could choose to wear hiking boots instead of tennis shoes to the mall or to the park. The substitute trend at the time of the case writing favored the sporting goods industry. Many younger consumers were turning to sporting good textiles and footwear as substitutes for other types of casual dress. The challenge for the sporting goods industry will be to determine and maintain the proper comfort to cost ratio to continue the positive trend.
Bargaining Power of Suppliers
The primary suppliers of the Nike, Reebok, and Adidas type sporting good companies are the contract manufacturers that make the shoes, clothing, and equipment and the suppliers of raw materials, such as the leather, cotton, and synthetics. On the manufacturing end, little supplier bargaining power exists because the manufacturing of the products does not require workers to have high levels of skill and education. Most sporting good companies do very little in-house manufacturing. Since the skill set for manufacturing sporting goods is low and the capital requirements for the equipment is low, manufacturing can be outsourced to regions of the world with low labor wages.
The raw materials used in the production of athletic apparel do not appear to be rare commodities. No one supplier would seem to have dominance in this market. No specific raw material supplier information was given in the case writing.
Bargaining Power of Consumers
Consumer bargaining power is becoming stronger as the trend to consolidate the retail sales business continues. Chains such as Foot Locker, the Sports Authority, and Foot Action are gobbling up mom and pop retail stores in the U.S. Manufactures of sporting goods equipment are dependent on retailers for premium pricing, brand push, and inventory control. As a result of these dependencies, it is in the best interests of the sporting goods manufacturers to maintain good relationships with retailers. Manufactures of sporting goods equipment like Nike with strong brand names are at less risk of being pushed around by retailers, because retailers are going to stock what is popular. Adidas, on the other hand, is less popular, putting it at risk of losing premium shelf space and market push with retailers.
Competitive Environment of Adidas
Adidas’s two primary competitors are Nike and Reebok. All three companies have attempted to establish them selves as leaders in supplying a high quality brand of athletic footwear, apparel, and gear. The following table compares the three companies in several key areas:
Sales$3.4 billion in total sales.
67% of sales in U.S.
75% of sales in footwear.$3.0 billion in total sales.
67% of sales in U.S.
90% of sales in footwear$1.7 billion in total sales.
15% of sales in U.S. and 75% of sales in Europe.
55% of sales in footwear and 40$ in clothing.
Market SegmentsHigh quality products targeted at teens and young adults. Dominates American basketball, football, and baseball segments.Very successful with woman market segment. Known as a producer of fitness footwear. Trying to capture more of Nike’s Sports segment.Middle ages men’s brand. Leader in the Soccer market segment.
R&DDone by coaches, athletes, and trainers. Have Air Sole Technology developed by NASA engineer.Pump and Hexalite Technology.Torsion Technonology. The Market and Sales department contains the R&D department.
10% of Sales.
$180mm U.S. vs. $100 mm Europe.
Primarily TV ads with ‘Just do it’ logo.$80mm in U.S., $25mm in Europe, and $10mm in Asia.
Equal TV and publication ads.
Athletic endorsements.Event marketing
6% of sales
75% of budget spent on promotions
TV ads are ineffective
Distribution77% of products are pre-ordered. Distribute to different market segments through segment specific stores (e.g. specialty shops for athletes)Offer incentives to get 50% of products pre-ordered. Unreliable delivery discourages pre-order, which makes inventory hard to control.
Selling, General, and Admin.22.3% of Revenues26.7% of Revenues39.7% of Revenues
Adidas’s biggest strengths are its long history in the sporting goods business, presences in Europe, lead in the sales of Soccer and Track and Field Sports Equipment, and German heritage. Adidas should use its legacy created in the sporting good industry in advertising campaigns as well as its German heritage. Adidas’s greater understanding of European culture should give it an advantage in terms of marketing in Europe. Women in soccer and the growth of popularity of soccer in the U.S. are both very big. Adidas should use soccer, track and field, and the fact that Germans are renowned for their engineering capabilities as an entry point to gaining market share in the U.S.
Adidas’s overhead is 13% higher in terms of percentage of revenues than Reebok and 17% higher than Nike’s. This increased overhead is not a result of an excessive advertising budget, since only 6% of Adidas sales goes toward advertising and 10% of Nike’s sales goes to marketing. The biggest opportunity that Adidas has is to reduce overhead by reorganizing its management structure and reducing the price that Adidas pays in leases and rent by divesting its in-house production facilities.
Adidas’s marketing department has become complacent over the years. Their promotional style of advertising does not work. When going to a professional sporting event, people do not see the tiny marks on the athletes’ shoes from the upper decks. Instead, they do see huge colorful billboards with logos such as ‘Just Do It’ and prime time advertisements of Michael Jordan slamming a basketball in a pair of Nike shoes. Trimming up Adidas’s overhead costs will free up cash for additional marketing resources and schemes.
Adidas has long lead times on its products and the delivery of its products is not reliable. The result of these types of problems in its supply chain is a lack of inventory control and the reason why Adidas has poor control over its inventory and lead the industry in clearance sales at 30% of production. The distribution information provided in the case writing is not easy to understand. It does appear from the information given that Adidas’s attempt to sell in the U.S. through subsidiaries places it at a cost disadvantage, since Nike sells directly to distributors.
Reebok has plans of going head-to-head with Nike for the lead in the professional sporting goods footwear market segment. Adidas has the opportunity to steal Reebok’s market share in the men and women’s fitness shoe segment – the largest overall segment – while Reebok focuses its resources on other areas of the market.
Footwear and textiles for fitness activities is by far the largest growing and biggest segment of the sporting goods industry. Adidas currently has no brand or group of products to compete specifically in this market segment. Adidas has the opportunity, while Nike and Reebok battle over the professional athlete and younger consumer market segment, to cash in on the fitness and fashion-conscious market segment.
Adidas currently has a large percentage of sales in athletic apparel. While Nike and Reebok battle it out over footwear, Adidas could use resources to gain more market share in the apparel market.
Exchange rates are a big threat. During the 1992 environment presented in the case, exchange rates were favorable for Adidas. Foreign goods were more expensive than Germany’s own goods. As a result, Germany was more likely to export goods than import. This would include shoes and favor Adidas in terms of maintaining share lead in Germany. The threat always exists for this scenario to change, making U.S. goods more appealing to Germany’s citizens. Perhaps the advantage to Adidas in terms of exchange rates is the only thing supporting its lead in the European markets.
Adidas does contain the market share lead in sales of cleated shoes for soccer and track and field type events and overall market share of sporting goods sold in Germany. As Nike and Reebok continue to dominate other segments, popularity of their brands in the cleated shoe line and in Europe could grow, eroding away at Adidas’s last footholds in the sporting goods industry.
Adidas Strategic Intent and Mission
Adidas’s intent should be to be viewed as the number one global supplier of fashionable top quality fitness footwear, textiles, and sports cleats. With this intent, Adidas should have a mission to make, distribute and sell the finest quality sporting goods that improves the potential of all the world’s athletes.
Key Result Areas
1. Become the industry-leading marketer of sporting goods.
Strategy: Adidas is being torn apart in marketing by both Reebok and Nike. In order for Adidas to regain the lead in the sporting goods business a new marketing strategy should be developed. Adidas should create an independent brand name for a fitness line of shoe that appeals to both males and females. Adidas should then have some of the top U.S. and European fitness instructors, trainers, super models, and actors and actresses endorse the product. Adidas should forget about the American football, baseball, and basketball markets. Let Nike and Reebok fight over this territory.
2. Have the most efficient production cycle in the industry.
Strategy: Reduce sourcing and production lead times to four months. Start by outsourcing all production to independent manufacturers. Get rid of all production in Europe and send to Asia, where costs are lower. For U.S. markets, outsource production to U.S. based facilities or to South American facilities and sell directly to retailers in the U.S. instead of subsidiaries.
3. Lead the industry in product innovation.
Strategy: Restructure the company’s management. With the current top down bureaucratic management structure, Adidas will never become a leading innovator. Adidas is trying to compete in two very different markets – the European market and the American Market. Each market should have its own executive with his or her own marketing/R&D, Sourcing & Logistics, Finance, and Human Resources departments and representatives from each of the countries in the two hemispheres should report to their respective executive. The U.S. department should be based in the U.S. and should have individuals in charge of each division that understands the U.S. market.