Strategic Analysis of Adidas Group

Adidas Strategic Analysis

Adidas is among the leading names in the sports shoe and apparel industry. During the recent years, the brand has made some strategic changes in its business model. This has led to better performance for Adidas. However, to grow faster internationally, this time the company has focused on the metropolitan cities. It expects to become the first true fast sports company of the world. The brand has also focused on sustainability and the use of sustainable materials for the production of shoes. In 2017, it created more than a million pairs of shoes made with Parley Ocean Plastic. Apart from that 93% of the cotton that  it sourced globally was Better Cotton. 2017 brought great financial results for Adidas. The brand achieved excellent financial results and its sales reached 21.2 Billion Euros reflecting a currency neutral growth of 16%. In  all the regions of the world except Russia/ CIS the brand achieved double digit growth rates in 2017. Its gross margin too climbed 120 basis points to 50.4% despite the currency headwinds. The brand expects to retain its momentum in 2018. By leveraging its scalable operating model, Adidas expects to grow its net income much faster than its revenues. Its mission  is to become the best sports shoe company of the world. For this it has selected three strategic areas to focus upon which include Speed, Cities and One source. Apart from these things, the focus of Adidas is on innovation and it is working on making products that are desired by athletes. It is also investing heavily in digitisation for faster and superior growth. During the last four years, its investment in research and development has grown quite fast. Its 2017 investment in research and development was 187 Million Euros rising from 149 million Euros in 2016. Apart from these things, the focus of the brand is on marketing. Adidas spent 2.732 Billion Euros on marketing in 2017 as compared to 2.41 Billion Euros in 2016.  Adidas’s growth is affected by several factors including severe competition from NIKE as well as Under Armour and apart from that changing tastes and the athleisure trends.

Adidas strategic analysis

External Analysis of the Sports shoe and apparel industry:

Apart from seeing very high level of competition, the sports shoe and apparel industry is also seeing very fast growth. The US athlete footwear industry saw a growth of 2% in 2017. While it generated 19.6 Billion dollars in sales, it also achieved a 2% growth in unit sales. The fastest growth was achieved in the ladies footwear category. This category saw an increase in sales of around 5% compared to the previous year. Apart from that, men’s and kid’s footwear categories saw  a growth of 1%. The largest category across athletic footwear right now in US is the Sports Leisure. This category saw a growth of 17% apart from having generated 9.6 Billion dollars in sales. Nike/Brand Jordan, Adidas, Skechers, Under Armour, and New Balance were the top selling brands in US based on dollar sales.Adidas in the meantime achieved the fastest growth with its sales growing at the rate of 50 percent. Among the top selling models in US were those from Nike and Jordan mainly while two from the house of adidas also made it to the list.

This was about the US industry. However, globally too the sports shoe and apparel are enjoying faster growth and higher sales. The global footwear industry was valued at 75.2 Billion dollars in 2015. By 2023 this is expected to have risen to 115.6 Billion dollars. Rising health consciousness and growing sports and gym infrastructure in the urban areas is expected to lead to growth in the sales of sports shoe, apparel and equipment. The modern generation is highly concerned for fitness but apart from that the rising economic activity has also led to growth in demand. Europe and North America are two dominant markets in terms of athletic footwear sales. the fast growing economies also accounted for  avery large part of the entire sales. While Nike is steadily dominating the sports footwear market, Adidas has revived its brand and made a string return in the recent years. Its financial performance in 2017 tells a story of fast growth drive by higher focus on innovation, sustainability and marketing.

Adidas SWOT Analysis 2018

This is a SWOT analysis of Adidas highlighting the strengths, weaknesses, opportunities and treats before the brand.

Strengths:

Brand image and equity:

Adidas is a well known brand in the world of sports shoe and apparel. While Nike is dominating the market, Adidas is still a very popular brand worldwide. Moreover, increased focus on marketing and product quality has resulted in increased popularity, growing sales and higher brand equity. Apart from suitable products, Adidas is focusing on a  better consumer experience for strengthening its brand image.

Focus on marketing:

Adidas has maintained heavy focus on marketing. Apart from investing heavily in marketing and digital promotions, it is reaching out to its customers using new channels.  while this has resulted in attractive sales, it has also led to better customer relations and overall brand image. Adidas uses several channels for marketing and promotions of its brand in order to connect with its customers. Higher investment in digital technology has also brought it closer to the customers and helped it grow its market share. Apart from these things, the brand also uses sponsorships and has partnered with several star athletes for the market glad growth of its brand.

Product innovation:

To strengthen its position in the sporting goods industry, Adidas has focused on creating the products the  meet the needs of professional as well as everyday athletes and the average consumer. Adidas remains highly committed to maintaining a full and innovative product pipeline as well as bringing new and groundbreaking technologies to life plus investing into advanced and sustainable methods of production.  the brand also keeps exploring possibilities of digitisation across its entire value chain. Adidas’s clear focus on making most innovative products for the athletes which enables them to perform at their very best. It has a special team dedicated to innovation called FUTURE that is responsible for developing a strong portfolio of innovation capabilities like new materials production processes and consumer centric scientific research. In 2017 too its newly launched products generated a large part of the sales.

Excellent supply chain and distribution network:

Another important strength of the Adidas brand is its large supply chain and extensive distribution network. Majority of its production takes place through independent suppliers. In order to keep its production costs low the brand has outsourced almost 100% of its production to independent suppliers most of which are located in Asia. the brand works closely with its strategic supply chain partners and provides them with detailed specifications for production and delivery. Majority of its products are made at 109 manufacturing facilities located globally. In 2017, it worked with 296 independent suppliers out of which 109 are strategic supply chain partners who have worked with Adidas for longer than ten years.

Fast growing sales and improved financial performance:

In the recent years, owing to the strategic changes that  Adidas made to its business model and changed its strategic focus, its sales and overall performance have grown a lot better. Its revenues in 2017 grew to 21218 million Euros rising from 18483 million Euros. This was  growth of 15%. During the same period, the gross profit of the brand increased from 9100 million Euros to 10703 million Euros. There was a 18% growth in the gross profit of the brand from 2016 to 2017. Operating profit of the brand increased by 31% from 1582 to 2070 million Euros.

Weaknesses:

Higher material and labor costs leading to higher cost of sales:

Cost of sales is defined as the expenses that Adidas pays third parties related to the production and delivery of its products. In addition to that Adidas’s own production expenses are also included in the cost of sales. Its 2017 cost of sales equalled 10.514 Billion Euros which represented an increase of 12%. Its 2016 cost of sales equalled 9.383 Billion Euros. While this reflects strong business growth on one side, on the other it also reflects the less favourable hedging rates as well as higher input costs caused by an increase in costs of raw material and labor.   

Overdependence on Developed economies:

Adidas still depends on the developed economies for a very large part of its sales. As a part of its new strategy it has shifted its focus on the megacities including London, Los Angeles, NewYork, Shanghai and Tokyo. However,  the fast growing economies also offer major opportunities of growth and the brand should focus on them simultaneously to reduce its dependence on Western markets.

Opportunities:

Fast growing sports shoe market:

The industry outlook for the sporting goods industry is bright. the sports shoe market has seen faster growth in the recent years because of improving economic conditions as well as higher health consciousness. Apart from Europe and North America, sales across the Asian region have also soared. This was reflected in the past years’ sales of the entire industry. This offers a major opportunity before brands like adidas which can now shift their focus towards the developing markets as well.

Digital Marketing opportunities:

The growth of digital technology has brought air opportunities for the marketers. Adidas must make the best of available technologies for better marketing as well as customer experience inside the store and online. Digital technology and AI can help improve customer experience manifold. Focus must remain mainly on engaging the millennial consumer.

Product innovation:

Product innovation can also be a major source of growth. Apart from growing demand for the products of athletic use, the demand for athleisure wears also grown. This is the fastest growing category in the sports shoe market. Adidas must make note of changing demand patterns and try to cater to the style needs of people that have eld to the rise of sports fashion or sports leisure trends.

Threats:

Heavy competition:

The competition in the sports shoe and apparel industry has kept growing intense. the top performers of the Industry included Nike/Jordan, Under Armour, Adidas, New Balance and Skechers. The heavy competition has also resulted in every brand investing aggressively in innovation and marketing. Apart from it brands are investing aggressively in Research and development. The heavy competition is driving operational and marketing costs higher for Adidas.

Economic fluctuations:

The continuing economic fluctuations in several markets of the globe are having a detrimental effect on the profits of brands like Adidas. In several markets economic fluctuations are still causing losses for brands. This is also a reason that Adidas shifted its focus towards the metropolitan cities.

Regulatory pressures:

Legal and regulatory pressures have increased in the 21st century leading to higher compliance and operational costs. While these pressures make entry of new brands difficult they also make the going tough for existing brands leaving them less space than they need for market growth and innovation.

Adidas PESTEL Analysis

Adidas is an international brand and operating in the global environment brings several challenges that can be of varied nature from political to economic to sociocultural. There are several factors in the global environment that a  brand may need overcoming to become a success.  A PESTEL analysis helps understand some of the most important forces that may affect a business in the global environment.

Political:

The political factors have kept growing in importance in the 21st century. It is because government oversight of political regulation of the businesses has grown. Around the world governments are now more active trying to make businesses more accountable and ethical. Apart from that other forms of government regulation including taxes and trade relationships also get to impact businesses.  Not just this the political environment of a market also affects its economic environment and how businesses will perform there. Political chaos leads to higher uncertainty and retarded growth leading to lower sales and profits for businesses. Moreover, political chaos can also lead to supply chain and business disruption and result in losses. In this way, political factors can become a major impediment to business growth of the political environment of a country is not favourable. 

Economic:

Economic factors are central to business growth and success. It is because retarded or stunted economic growth results in lower employment and lower spending power of people which can in turn result in lower sales and lost profits. the world had seen a period of bitter recession just some years ago. During that  period the employment level had fallen dismally causing the spending power of people to fall and sales of profits of businesses to decline. Now that economic growth has returned businesses are experiencing higher sales and growing profits. Economic growth has resulted in higher employment which has led to higher income of people and better spending on fashion and sporting goods. As a result brands like Adidas are also experiencing higher sales worldwide.  So, higher economic activity is profitable for businesses whereas economic slowdown results in less sales and profits. 

Sociocultural:

The importance of sociocultural factors too in the context of business has increased. Globally society and culture are not the same everywhere and from East to West there are wide variations in terms of society and culture. It is why the same business and marketing strategy would not work in all the markets. From market to market and society to society, the business practices vary because of varying cultures. As such businesses have to adopt different marketing and business strategies for different markets. the changing demographics of the global population are also affecting businesses.  Changing social trends to have a direct impact on how global brands do business. The brands are now focusing on the millennial generation as well as its tastes and needs.  They are trying to bring products that suit its taste and it is the central focus of the brands even in terms of product innovation.

Technological:

Technological factors are now more and more critical to business growth than ever. It is because technology facts everything from marketing to operations and sales as well as customer service and engagement. Brands are investing in technology everywhere from supply chain to marketing and sales. Adidas has also made  huge investment in digitisation. It is using digital technology for marketing as well as in its supply chain for better production. the brand has retained heavy focus on innovation and has been consistently growing its investment in Research and development to remain ahead of the others. Technology is an enabler of performance and it is why Adidas is eosin it in all areas to find faster growth. In 2017 Adidas spent 187 Million Euros on R&D as compared to 149 Million Euros in 2016.

Environmental:

The environmental factors have directly become one of the central focuses for the global businesses in the modern era. It is because sustainability has become more important than ever. While governments have formed strict rules regarding sustainability and environmental protection, consumers are also more aware of environmental issues and like to buy only from the businesses that follow sustainable practices. As a result global brands are focusing heavily on sustainability and making sustainable products as well as having sustainable supply chains and manufacturing facilities. Adidas is making more and more products from sustainable material and adopting sustainable practices down its supply chain.

Legal:

Legal factors have also grown highly important in the 21st century. Law and legal compliance are creating severe pressure on businesses. From product quality to environment and labor there are laws in every area that the businesses need to comply with globally. Moreover, legal compliance is adding to the operational costs of businesses. Non compliance mostly results in huge fines and heavy losses.

Adidas Five Forces Analysis

Bargaining power of suppliers:

The bargaining power of Adidas’s suppliers is low which is because while they are scattered most of them are quite small in size. Moreover, Adidas has formed strict rules related to product quality and sustainability that the suppliers must follow. It is why out of the 296 suppliers that  it worked with in 2017, only 109 are its strategic supply chain partners. These strategic partners are the ones that  have worked for ten years or longer with Adidas. While Adidas always has more options to choose from the suppliers cannot afford to lose business from Adidas. Adidas’s large size, global presence and financial strength all keep the bargaining power of the suppliers under control.

Bargaining power of customers:

The bargaining power of customers has increased in the 21st century which is because while the 21st century is a highly informed consumer, he is also having more options than ever. He can select from a large number of brands offering a wide range of products. Apart from product innovation in the sport good industry and increased spending on marketing and customer retention, brands are also investing in customer engagement and customer experience. Higher competition in this industry has also added to the bargaining power of the customers. Some of the factors that moderate the bargaining power of customers include Adidas’s brand image, its financial strength and global expansion.

Threat from substitute products:

The threat of substitute products mainly comes from the products made by the rival brands. Some of the main competitors of Adidas include Nike, Skechers, New Balance and Under Armour. Apart from these were are several local brands in the market that also act as substitute products for Adidas.  Some of the factors that moderate threat from the substitute brands and products include brand image, marketing efforts, and global presence. The overall threat from substitute products  for Adidas remains moderate.

Threat of new entrants:

The threat of new players entering the industry and the market is moderate which is because there are several hurdles to entry. Any brand would have to spend a significant sum to start a business in the sports shoe industry. Moreover, while one can start at a local level, to turn into a major brand at a  global level, one would have to invest a very large sum which ranges in Billions. From operational infrastructure to marketing and HR, there is a significant investment in each area. Apart from that the legal hurdles are also there making it difficult for new brands to enter. the overall threat from new players is moderate.

Competitive rivalry among the existing brands:

The level of competitive rivalry among the existing brands in the sporting goods industry is intense. Even if the number of major players in the industry is limited, the battle for market share and customer base is intense which leads to higher competition. Each brand invests aggressively in marketing as well as research and development. Innovation has become a key focus for each of the sporting good brands in 21st century.  Adidas is among the leading brands. However, it is facing stiff competition from the rivals like Nike, Under Armour, Skechers and New Balance. The overall rivalry among the leading global brands of sports shoes and apparel is high.

Adidas Value Chain Analysis

Primary Activities:

Inbound logistics:

Adidas has smartly managed a large supply chain. Last year, it worked with around 296 suppliers from around the world. Products made by these suppliers are then shipped to its warehouses. Adidas uses IT and digital technology to manage its inbound logistics and deliveries.

Operations:

Adidas owns around 2500 retail stores. Apart from them it has 13000 mono branded franchise stores and around 150,000 wholesale doors from which it sells its products. Its commerce channel is available to customers across 40 countries.

Outbound logistics:

Adidas receives products from its suppliers at its warehouses. It has several large distribution centres located in various parts of the globe. from there the products are distributed to the retailers and wholesalers. It uses advanced technologies and software to track inventory.

Marketing & Sales:

Adidas places heavy focus on marketing. Apart from digital technology, it also uses a large mix of channels to reach its customers. Moreover, the brand has partnerships with several sports personalities for the sponsorship of its brands. Events and other methods are also used for marketing and increasing sales. It is also using its commerce channel efficiently for marketing and sales.

Support Activities:

Procurement:

Adidas has a special goal operations team to take care of supply chain management that sources raw materials and partners with suppliers for the production and deliveries of goods. Apart from that the team also gets to select which partners to choose for supply purposes.

HRM:

Human resource management is also an important focus at Adidas which had 56,888 employees in 2017. the brand has also focused on establishing a great culture that  fosters inclusion and diversity and an environment of collaboration and innovation. The brand takes good care of career growth and development of its employees.

Technology:

Technology being a key focus at Adidas, the brand spends heavily in these areas throughout its business from marketing to operations and sales. Whether down the supply chain or in its distribution network and inside the store technology is everywhere. During the past few years, it has invested heavily in digital technology. the brand’s growth has come from a heavy investment in technology. Its commerce channel serves customers in 40 countries.

Infrastructure:

Adidas has managed  a very large infrastructure that consists of its offices, retail stores as well as warehouses and distribution centres. This infrastructure is spread over several countries. Its total assets in 2017 were worth 14.5 Billion Euros.

Adidas Business Strategy & Competitive Advantage

Adidas is a globally renowned brand of sports shoes and apparel.  However, the intensity of competitive rivalry in the sports shoe industry is growing and to overcome the competitive pressure, any brand must have a strong business strategy as well as some sources of competitive advantage. In the past two years Adidas has achieved very fast growth which is fastest of all the sportswear brands currently. This kind of impressive growth has been made possible through strategic changes in the areas of production as well as marketing. Adidas revised its focus on key markets and also invested more in innovative production. Some important areas where it focused include supply chain management, production strategy, sustainability, key metropolitan markets and marketing. Adidas is trying to achieve faster international growth but before that its focus is upon achieving higher sales through investment in key business markets. The largest part of the world’s GDP is created in the major metropolitan cities of the world. It is why Adidas’ focus is upon these cities. Apart from that the brand is trying to cater to the needs and taste of the GEnX while trying to leave the least impact on the environment. To minimise its carbon footprint, it invested in several key partnerships that are helping it make products from sustainable material. Research and development is also a key area where Adidas raised its investment. However, to maximise the impact , it was essential that the brand invested in innovative marketing. Investing in digital technology is generating results.

The most critical sources of competitive advantage for the brand are:

– Product innovation:

– marketing

– research and development

– global presence

– customer loyalty

While some of these sources have created sustainable competitive advantage for the brand, the others have generated temporary advantage that the brand is trying to strengthen further by investing in R&D and marketing. Human resources is also a very important area and a critical source of sustainable advantage in this era. Adidas has achieved some distinguishable advantage in HRM by continuously investing in better management through the use of digital technology, higher staff engagement and satisfaction as well as through effective policy making in this area.

 Adidas VRIO Analysis:

Key resources & Capabilities of Adidas:

Brand image & Equity:

Adidas has managed a great image as an innovative brand that makes attractive products. It has also maintained an excellent level of popularity and trust among its customers.

Global Presence:

The brand is present globally in several countries. Its commerce channel also touches 40 nations.

technological capabilities:

Adidas has retained heavy focus on technology and invests in technology in all areas. Investment in digital technology has also started paying it off and the brand’s sales ahem jumped very fast. Apart from marketing, it invests in technology in supply chain and many more areas.

HRM & culture:

HRM and a unique organisational culture are also an important focus at Adidas. The brand has focused on building a strong organisational culture and giving its employees all that they deserve from nice salaries to a great work environment and opportunities of growth.

Marketing capabilities:

Adidas recently updated its marketing strategy and its renewed focus on marketing is paying off well. It has also increased its spending on marketing, focusing especially on digital marketing.

Strong supply chain:

The brand has managed a string supply chain and distribution network. It has strategic relationships with 109 suppliers and in 2017, it worked with 296 suppliers.

Customer loyalty:

Adidas is a popular brand with a  large following of loyal customers and fans. the brand has acquired a high level of customer loyalty through product innovation dn ethical business.

Resources/Capabilities

Valuable

Rare

Inimitable

Exploited

Implications

Brand Image

Yes

Yes

Yes

Yes

Competitive Advantage

Global Presence

Yes

Yes

No

Yes

Temporary Advantage

Technology

Yes

yes

Yes

Yes

Competitive Advantage

HRM

Yes

Yes

No

Yes

temporary Advantage

Marketing

Yes

Yes

No

Yes

temporary Advantage

Customer Loyalty

Yes

Yes

No

Yes

temporary Advantage

Supply chain

Yes

Yes

No

Yes

temporary Advantage

Adidas Financial Analysis :

2017 was an year of strong financial performance by Adidas.

  • Currency-neutral revenues increase 16% – This reflects mainly the 18% growth achieved by brand Adidas. This growth was chiefly driven by double-digit sales increases in the running category as well as at adidas Originals and adidas neo. Combined sales of Adidas and Reebok grew at double digits throughout nearly all regions.
  • Operating margin increases 1.2pp to 9.8% – The brand’s gross margin improved 1.2 percentage points to 50.4%. Better pricing and product mix affected this development.
  • Net income from continuing operations rose 32% to € 1.430 billion
  • Basic EPS from continuing operations grew 31% to € 7.05
  • Management proposes dividend of € 2.60 per share

Suggestions:

Adidas has smartly managed its marketing strategy and efforts. Now, it must focus on higher customer engagement. To get on par with its biggest competitor nIke, the brand will need to focus on customer retention and engagement. This will help drive CSLV for each customer higher.

– The brand has achieved double digit growth rate through most markets and now the focus must be on retaining the momentum in future. To sustain this growth rate, attractive customer experience and strong customer service are important.

– Apart from the megacities, it must also target the tier 2 cities where the number of modern working class professionals has kept growing.

– After Europe and North America, focus has shifted to the fast growing Asian markets. Adidas should target these markets through localised strategies in order to find faster growth.

Sources:

Adidas Annual Report 2017

https://www.adidas-group.com/en/investors/financial-reports/#/2017/

https://www.wiseguyreports.com/reports/1023964-athletic-footwear-market-global-demand-growth-analysis-opportunity-outlook-2023

https://www.npd.com/wps/portal/npd/us/news/press-releases/2018/us-athletic-footwear-industry-sales-grew-2-percent-to-19-6-billion-in-2017-npd-group-reports/

Abhijeet Pratap

I am Abhijeet Pratap, editor of notesmatic. I am an MBA with marketing (major). Apart from writing on various topics in business management, marketing and English literature, I like to read and write about technology.