|Brands Owned||Adidas, Reebok.|
|Industry||Sports shoe & apparel.|
|Net Revenue 2018||€ 21.9 Billion|
|Net Income 2018||€ 1.7 Billion|
|Competitors||Nike, Under Armour, Puma, Fila, New Balance.|
Adidas is among the leading sports shoe and apparel brands. The sports shoe industry has grown highly competitive with Nike, Adidas and Under Armour leading the game. However, if we compare the performance of the largest two brands in recent years, Adidas is in an aggressive mood and all set to outperform Nike. Competition between the two is growing all the more intense with time. The global sports shoe industry is expected to grow at a healthy rate over the next five years. In 2017, it was valued at around $64 billion. Between 2018 and 2025, the sports shoe industry is expected to grow at a CAGR rate of 5%.
Growth in the sports shoe industry is driven by several factors including technological advancements, proliferation of marketing, sales and distribution channels as well as athleisure trends. Rising health consciousness and enthusiasm for sports are also driving an increase in sales of sports shoes and apparel. Adidas is ambitious to gain higher market share and is investing in research and development. Net sales of both Adidas and Reebok grew in 2018 driven by latest product offerings. 2018 was a profitable year for Adidas. The company is growing its focus on product innovation and sustainability to cater to the changing customer demands.
Learn more about Adidas, its business strengths, weaknesses, opportunities and threats in this SWOT analysis.
Brand image :
Adidas is a well known sports shoe and apparel brand with a strong image throughout the world. The company has maintained a strong brand image. Its focus on innovation, product quality, style and marketing have enabled Adidas to build a strong image and high customer trust. Strong brand equity in the shoe industry translates into higher sales and revenue. For past some years, since Adidas grew its investment in marketing, its image and brand recognition have also grown stronger. The brand is also investing in sustainability innovation and building sustainable products to grow its popularity.
Supply chain management :
Supply chain management of Adidas is also an important strength of the brand. The brand needs good quality sustainable material to make the products it sells. To obtain the raw material, it needs for producing shoes and apparel, the company sources from suppliers around the world. It has managed its large and global supply chain responsibly.
Adidas has also outsourced its manufacturing to external manufacturers. Adidas works with total 700 independent suppliers who manufacture Adidas products in more than 50 countries. The supply chain of Adidas is global and multi-tiered and includes both direct and indirect contractors.
130 manufacturing partners make most of its products. Out of these, 26 are strategic partners and produce the majority of its products in 82 manufacturing facilities. Adidas offers its suppliers continuous training and education. It also carries out regular audits to manage supplier performance.
Focus upon innovation :
As a sports shoe brand, Adidas invests a major sum each year in research and development. Customer trends in the shoe industry have changed fast and competition has also grown stronger. This has resulted in growing need for product innovation. Brands need to keep bringing new and stylish products to shelves to sustain the level of demand in the market. During the recent years, Adidas has focused upon bringing more and more sustainable products to the market. The new products launched by Adidas generated most of its sales in 2018. The company’s investment in R&D was however, lower in 2018 than 2017. In 2018, the company invested $153 million in R&D compared to $187 million in 2017. Moreover, the company is focused on manufacturing innovation to grow its fast product design and development capabilities and to enable product innovation. Another core focus of Adidas is digitalization.
Focus upon marketing :
Adidas has seen faster growth in the last few years and one of the central factors driving its growth is its increased focus on marketing. Nike is its nearest competitor and is also known for its heavy focus upon marketing. Adidas is also trying more targeted and aggressive tactics for marketing of its brand. In recent years, it has increased its investment in marketing and promotion. Its marketing expenses in 2018 were 10% higher compared to the previous year. The brand spent €3 billion on advertising and promotions as compared to €2.7 billion in 2017.
Adidas is using several channels for marketing. However, digital marketing and customer engagement is a core focus in this area. The company also promotes its brand and products through sponsorships, leading sports personalities and major sports events globally. Leading events at which Adidas promotes its products include FIFA World Cup, UEFA Euro, the UEFA Champions leagues, the Olympic games, the Boston and Berlin Marathons etc. Apart from these, the brand targets football fans by sponsoring high profile football teams and individual players like Lionel Messi. Adidas also tries to achieve the best results from its marketing investments and doing more by investing less.
International expansion :
Adidas is an international sports brand. In 2018, its core focus were North America and China markets. North America is a priority market for Adidas. The brand is strategically growing its investment in North America in assets, infrastructure and people. The company has divided its business on a geographic basis. The geographic segments of Adidas include Europe, North America, Russia/CIS, Asia Pacific, Latin America and the emerging markets. Apart from its geographical reach through physical stores, the brand is also reaching its customers through e-commerce channels.
The brand has established a large and global network of physical stores. Worldwide, Adidas has more than 2,300 company owned retail stores, more than 14,000 mono-branded franchise stores as well as more than 150,000 wholesale stores. The ecommerce platform of Adidas sells to customers in more than 40 countries.
Large product portfolio made from sustainable material:
Adidas has continued to expand its product portfolio over the recent years by introducing several new models. These models were the primary driver of sales and revenue in 2018. In recent years, the brand also made changes to its product portfolio to focus upon its core products including shoes and apparel. In 2017, the brand completed the sales of its TaylorMade, Adams Golf and Ashworth brands and CCM hockey business. It is also using more and more of sustainable and recycled raw materials for the production of footwear and apparel. Both Adidas and Reebok brands have adopted this strategy to grow their range of innovative products.
In 2018, Reebok introduced ‘Liquid Floatride Run’ made using Reebok’s Liquid factory technology. The company produced more than 500 million shoes in 2018 using recycled plastic waste. Adidas plans to double this number in 2019.
Growing operating expenses :
With growing prices of raw material and labor, the operating expenses of Adidas have also kept growing. The revenue of Adidas has increased but so have its operating expenses. The company has grown its investment in marketing and it reflected in the form of higher other operating expenses. Other operating expenses of the brand grew past €9 billion in 2018 and were more than €350 million higher than the previous year. Growing operating expenses can shrink profit margins and affect net income adversely.
Overdependence on external suppliers :
Adidas depends entirely on external partners for the production of the products it sells. It has outsourced nearly all of its production to external suppliers located in Asia and other parts of the world. On the one hand, while it allows Adidas to focus on other aspects of business, on the other it adds to operating costs. Adidas could bring costs down through backward integration.
Athleisure trends :
Athleisure trends have led to growing sales of sports shoes and apparel. Not just men’s segment, but sales in the women’s segment have also increased. People are looking for sports shoes and apparel that are stylish. They like wearing them as casual fashion. Growing athleisure trends present a wonderful opportunity of growth for the sports shoe brands. Adidas is investing in product innovation to bring latest designs to the market and grow its sales and revenue.
Demand in Asian markets :
Asian markets and particularly the emerging markets present a wonderful growth opportunity for brands like Adidas. Increasing number of stores and distributor network in these markets will help the brand find faster growth there. Apart from China, other Asian markets like India, Malaysia and Singapore also present excellent growth opportunities.
Digital marketing & Customer engagement :
Proliferation of digital technology has brought attractive marketing opportunities for fashion and sports brands who can attract more customers and grow their sales by using digital marketing and customer engagement techniques. Adidas is focusing on digitalization. However, it must use both content marketing and video marketing channels to grow customer engagement and develop better customer relationships.
Backward integration :
Backward integration can reduce the operating costs of Adidas. Currently, the brand has outsourced virtually all of its production to external partners. It should try backward integration. This will enable the brand to reduce production times and bring latest designs to the market faster. Product innovation can also be accelerated through the help of backward integration.
Ecommerce : –
Adidas sales from e-commerce channels are growing. In 2018, the global e-commerce channel of adidas was among its fastest growing channels. There was 36% yoy increase in Adidas ecommerce sales. However, to find faster growth, the brand must also utilize other ecommerce brands including global and local ecommerce sites. Partnerships with ecommerce brands like Amazon, Flipkart, alibaba etc can help the brand grow its sales worldwide.
Competitive pressure :
Competitive pressure in the sports shoe industry has kept growing. Not just Adidas, but its rival brands are also investing aggressively in marketing as well as research and development to grow their sales and revenue. Higher competitive pressure also creates pressure on the bottomline by driving operating expenses high. There are several competitors of Adidas in the market including Nike, Under Armour, Puma, Fila, New Balance and several more.
Market fluctuations :
Economic fluctuations in key regions where Adidas sells its products including North America, China, and Asia Pacific may slow down Adidas sales and lead to decline in revenue. Decline in economic activity in any of these regions can cause a decline in revenue and profits for the brand. Fluctuations in currency exchange rates can also cause losses for the brand. A stronger dollar is already hurting the profits of sports shoe brands.
Regulatory pressures :
Regulatory pressures are also adding to the problems faced by the sports shoe brands. These companies are under immense pressure related to market expansion and compliance. Apart from taxes and laws applicable in the areas of labor, product quality and environment, there are several more laws that require compliance. Growing compliance pressure also adds to compliance costs of the international brands.
Growing cost of raw materials and labor :
The costs of raw materials are also growing each year and leading to higher operating expenses for sports brands. Apart from raw material, the costs of labor are also growing which are adding to the operating expenses. Moreover, Adidas sources only high quality raw material for producing only superior quality products. During the recent years, it has grown its focus on products made from sustainable and recycled raw materials. Overall, with costs growing higher the pressure on the bottom line of sports brands is also high.
Adidas is a leading sports shoe and apparel brand that has enjoyed superior growth in recent years driven by higher focus on product innovation and marketing. The focus of Adidas has been on North American markets which are a priority market and mainly the metropolitan cities where most of its customers are found. The brand has also increased its investment in digitalization and sustainability. In 2018, growth of Adidas was primarily driven by the latest models. The company released several new products and was able to achieve higher sales from its e-commerce channel. The business of Adidas is seeing impressive growth. However, there are challenges ahead. Apart from higher customer engagement, the brand also needs to focus upon controlling costs. For continuous growth and superior performance, the brand needs to grow its penetration in the Asian markets. However, the competitive strength of Adidas has grown in recent years and one can expect its growth momentum to sustain in the coming years.
- Other Sources:
- Adidas Annual Report 2018.