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					 adidas strategy for past 10 years
   Acquisitions to help surpass Nike as leader of global sporting goods industry
   1998 acquisition of French SG Mfg and marketer Salomon SA
       €1.5B acquisition
       Diversified beyond footwear and apparel
       Now into ski equip, golf clubs, cycling components, winter sports apparel
       Surpassed Reebok to become 2nd largest sporting goods company
       1998 sales €5.1B
       Acquisition was not all good
           Winter sports industry not as attractive
           Integration problems between Adidas footwear and apparel business and Salomon’s
              business units
           5 years after acquisition (2003) EPS returned to 1997 level
           Stock price took until 2004 to return to its’ 1998 level
           Divested winter sports and cycling component brands to Amer Sports Corp. in 2005 for
              €485M.
               This made TaylorMade Golf the lone business left from the Solomon SA acquisition
       In 2006 acquired Reebok International Ltd for €3.1B after the divestiture.
           This gave them:
               Reebok footwear and apparel
               Rockport footwear
               Greg Norman apparel
               CCM hockey equipment
           What else did the Reebok acquisition do for them?
               Increased revenues from €5.8B in 2005 to €10.1B ($13.3B) in 2006
               Got them closer to Nike ($14.9B) in 2006
               Adidas revenue to €10.3B by end of 2007
               Expected the Reebok acquisition to boost revenues an additional €250M
               Integration of Reebok and Adidas supply chain
                   Expected cost savings of to €105M by end of 2008
                   Expected contributions to the company’s gross margin and bottom line

    Despite all this, Nike continues to hold substantial lead over Adidas in the US footwear market
      Nike 36% vs. Adidas and Reebok 21% market share in 2008
      New Balance CEO basically goes on record as saying Nike will continue to be #1
      See Exhibit 1 for financials on page C-333 (1998-2007)
      See Exhibit 2 for common share performance on p C-334 (Oct 1999 – Oct 2008)
      See Exhibit 3 for balance sheets for Adidas for 2006 and 2007

 Company History
   1920 Adolph Dassler designed and produced footwear for athletes
   1924 Rudolf Dassler, his brother, joined him
   Dassler Brother’s Shoe Factory in Bavaria
   1925
      First major innovation – studs and spikes in shoes
      Continued with key innovations – arch supports
      Many of today’s standard features in athletic footwear came from them
      Adi Dassler – 700 patents
 Also very innovative in marketing
   Gave shoes to athletes in 1928 Olympic games
   By 1936 Olympics, most athletes wore only their shoes – Jesse Owens (4 Gold)
   1937 – 30 styles of shoes for athletes in 11 sports
   2 stripes applied to each side of each shoe

 Produced boots during WWII for Nazi Germany
   Returned to shoe production in 1947 but company dissolved in 1948
      Brothers were in a feud
   Rudi established own shoe company (Puma)
   Adi renamed the company Adidas (first and last name combined)
      Put a third stripe to the sides of the shoes and registered as trademark in 1949
   The two rival company’s were highly competitive
      Cross town rivals

 Adi kept up on innovations
   1949 rubber cleats
   1952 track shoes with screw-in spikes
   1954 soccer shoes with screw-in studs (Germany won World Cup that year)
   By 1960, Adidas was the favorites among athletes (75%)
   Began producing soccer balls in 1963
   Began producing athletic apparel in 1967
   Dominated athletic footwear industry through the early 70’s
   Leading brand of jogging shoe in early 70’s in the US
   T-shirts and apparel popular among US teens during the 70’s

 The emergence of Nike – Nike emerging in the US in the early 70’s
   Adi dies in 1978
   Adidas the WW leader in athletic footwear
   But rapidly losing market share in the US to newcomer Nike
   Nike shoes first appeared the 72 Olympic trials in Oregon
   Nike best selling training shoe in US by 1974
   Adidas successors, Adi Dassler and son Horst drastically underestimated NIKE
   Adidas still concerned greatly with Puma
   Nike pulls ahead in US athletic footwear market
   New styles, variety, new colors, endorsements
   Adidas still #1 among athletes but Nike the market leader in US footwear
   Nike signs Michael Jordan to a $2.5M endorsement contract after Adidas passed on the
      opportunity earlier that same year- dumb shits!
   Horst dies in 1987
   Nike becomes undisputed leader in US athletic footwear market - $1B in annual sales
   Adidas performance tanks after death of Horst
       No clear direction from the top
       Quality declines
       Innovation rapidly deteriorating
       1990 – Adidas falls to #8 in US athletic footwear market (only 2% share)
       Basically everything that could give them a competitive advantage was gone!
          From 1987 to 1993
            Controlling interest in the company sold to group of French investors
            Led by Robert Louis-Dreyfus
               Tried to turn the company around
                   Cost-cutting measures
                   Improved styling
                   New models
                   Endorsement contracts
                       Kobe Bryant
                       Anna Kournikova
                       David Beckham
                       1994 annual sales in US up by 75% from 1993
                       Improved market share to become #3 seller of athletic footwear in US
                       Trailed only Nike and Reebok

 The 1998 Salomon SA Acquisition - €1.5B
   In 1995 and 1997, sales and earning growing at annual rates of 38.3% and 37.5%
   But company still a distant #3 in WW athletic footwear and apparel industry
   Nike 1997 revenues of $9.2B were 3X greater than adidas
   Nike still growing at fast pace
   Nike getting into international markets
   The Salomon acquisition in late 1997
       intended to diversify adidas beyond footwear and apparel
       remember adidas goal is to beat Nike
       Contained a number of strong businesses
          Ski equipment leaders
          TaylorMade golf (#2 in golf equipment)
          Mavic –leading producer of bike rims and wheels
          Snowboard and skateboard equipment
       acquisition did help them surpass Reebok who was number 2 in sporting goods
       the immediate negatives of the acquisition
          adidas share price fell – fear the cost of acquisition was too high
          uncertainty about how adidas would finance the acquisition
          concern over adidas lack of experience in manufacturing
              apparel and footwear was all contracted out
          Louis-Dreyfus expected increase in pretax profits by 20-25% annually thru 2000
              this never happened
              winter sports and golf industry turned out to be not as attractive
              net loss of $164M for adidas-Salomon in 1998 (first 3 quarters)
              the integration of the new business was not smooth
              by 1999, shared price down one-third from 1998 high
                   all this trouble had the large investors worried and nervous
              early 2000, Robert Louis-Dreyfus stepped down as CEO
              Herbert Hainter, head of marketing in Europe and Asia replaced him
                   cut costs, increased advertising, new endorsements
                   opened retail distribution to company-owned stores
    Adidas Broad Corporate Restructuring Plan
      Was supposed to help them surpass Nike as WW leader in sporting goods
      looked doubtful from the start
          winter sports industry strength was declining
          integration problems
          EPS dropped upon the acquisition and took 5 years to recover
          stock price took 6 years to recover
          winter sports business did not contribute much at all to the bottom line
          TaylorMade did seem to turn the corner in 2005 with earning up after a 3 year decline
      The 2005 Divestiture of Salomon Business Units
          all winter sports brands and Mavic bike components to Amer Sports Corp in 2005
          Amer Sports = Atomic skis and Wilson Sporting Goods
          €485M
          adidas kept only TaylorMade form the 1998 acquisition
          company name changed to adidas AG
      The 2006 Acquisition of Reebok International Ltd.
          August 2005 announced the acquisition of Reebok for €3.1B
          the final component in focusing the business on athletic footwear and apparel
          In 2004, Rockport and Reebok hockey brands contributed $377.6M and $146.0M
          total company sales of $3.8B
          Greg Norman golf apparel $50M in 2004
          see Exhibit 4 C-338 for sales by product line and geographic region (2002-2004)

    Performance Expectations for adidas’s Restructured Business Lineup
      observers not convinced adidas could surpass Nike even after restructuring
      “German mentality of control, engineering, and production” was of concern
      Reebok was a “US-marketing-driven culture”
      Nike may just bee too far ahead as the global brand leader!

 adidas’s Corporate Strategy in 2008
   Organized under 3 units based on the company’s core brands
   3 business segments
       adidas
       Reebok
       TaylorMade-adidas Golf
   Corporate Strategy
       extending its leadership in product innovation
           contributed to differentiation strategy of each of the 3 business units
           each unit was to develop at least one major product innovation per year in each product
              category
               2008 TaylorMade came up with moveable weights and interchangeable shafts
               2007 adidas footwear and apparel division introduced new family of running shoes
                  as well as a line of gym and yoga apparel
               2007 Reebok launched new running shoes and hockey uniform systems
                   also improved quality of Rockport footwear (incorporated Torsion system from
                      adidas running shoes)
       creating a differentiated image for products offered by each of its 3 business segments
      expand controlled retail space through its network of company-owned stores
      achieve efficiencies in its global supply chain processes and activities
      performance of the business units 1998-2007 in Exhibit 5 on C-339
      adidas also relied on “brand-building activities” to differentiate their brands from the
       competition
        partnerships with sporting events
        partnerships with notable athletes critical to creating a distinctive image with customers
        provide retailers with superior customer service
             on-time deliveries
             realized retailers were critical elements of the value chain
      controlled retail space
        give customers a thorough understanding of product features
        maximize the point-of-sale experience
        mono-branded retail stores
        factory outlets
        team apparel stores in stadiums and arenas
        e-commerce sites
        company-owned stores expected to generate 30% of revenues by 2010
      efficient supply chain management
        very important to get new styles to market quickly
        importance of low cost manufacturing
        outsourcing critical – 95% of production outsourced throughout Asia
        2005 World Class Supply Chain Initiative launched
             to improve coordination with its contract manufacturers
             to lower costs
             to get new products to market quicker
             reduced contract manufacturers from 547 in 2005 to 377 in 2007
             reengineered replenishment activities (but still kept inventory levels under control)
        What was the new adidas expecting?
             expected to see improvements in gross profit margins from 47% in 2007 to 48% in
                2008
             expected to see improvements in operating margin from 9.2% in 2007 to 9.5% in
                2008
             expected to see profitability improvements in Europe
             expected to see strong top-line and bottom-line growth in Asia
             expected to see the Reebok integration in North America to deliver gains in
                operating profit margins
             The EC expected to see operational efficiency coupled with product innovation to
                provide a synergy that would allow adidas to be #1 or #2 in each of the sporting
                good segments where it competed

 adidas Footwear and Apparel
   two categories based on clothing needs
       Sport Performance group
           shoes for running, soccer, basketball, and general training
           accounts for 80% of adidas branded apparel and footwear sales in 2007
          Sport Style group
            for those looking for the comfort of athletic apparel
            small fraction of sales BUT higher profit margins as R&D budget was small
            market growing at a faster rate than the market for actual sports products
            accounted for 20% of adidas-branded apparel and footwear sales in 2007
                a 1% decline from 2006 to 2007
            this group had 2 segments
                adidas originals
                    consumers are hip-hop fans, surfers and skateboarders and young
                        metropolitans
                    warm-up suits, T’s, and the classics
                    young consumers
                    jeans, Diesel
                Y-3
                    women’s tights, skirts, blouses, and leather jackets
                    men’s jeans, coats, leather jackets, polo shirts, and stretch pants
      annual growth rate for global athletic footwear and apparel (2006-2007)
        slowed from 6.8% in 2005 to 3.3% in 2007
        at $42.5B – North America was the largest market
        North America annual growth rate 3%
        Europe’s annual growth rate 2%
        Eastern Europe growth rate 20%
        South and Central Asia growth rate 13%
        China growth rate 15%
      adidas product categories
        strongest was soccer = market share >50% in Europe and North America
        runner up to Nike in most other categories
        the adidas advantage came through INNOVATIONS!
            cushion systems for running shoes
            apparel designed to increase blood flow during activity
            endorsements and individual and league sponsorships

 Worldwide Breakdown
   Europe accounted for 50% of footwear and apparel in 2007
      8% increase in 2007 alone (mainly Russia)
   North America accounted for 18% of total sales of athletic gear
      5% increase in 2007
   Asia accounted for 24% of adidas-branded apparel and footwear sales
      17% growth in 2007 (mainly China)
   Latin America accounted for 8% of adidas-branded apparel and footwear sales
      39% growth in 2007
   adidas was market share leader in Europe’s developed markets for athletic footwear and
     apparel
   adidas also wanted to lead in emerging markets in Eastern Europe and Asia
      sales growing 50% annually in Russia, Ukraine, Armenia, Belarus
      a 2-1 margin over runner-up Nike
    adidas expectations
      expected Russia to become its largest and most profitable market in Europe by 2010
      Asia to become the largest market in the short run (lots of people)
      buying Reebok increased NA presence (double sales by 2005)
          but still trailed Nike by a 15 point margin in 2005
    Exhibit 6 C-343 shows financial performance for 1998-2007


 Reebok
   acquired in 2006 by adidas AG to increase sales in NA
      $2B of their $3.7B in sales were in NA from selling Reebok goods
      the Reebok name was suffering from a poor reputation
          low quality
          poor innovation attempts
          lack of styling
          all things that adidas has proven to be effective at
      Reebok had its loyal customers though (esp women)
      wanted to use Reebok to focus on beginning and recreational running and women athletes
      they partnered with Avon Walk Around the World for Breast Cancer
      also looked to endorsements in men’s sports
          Peyton and Eli Manning
          Allen Iverson
          Yoa Ming
          David Ortiz
          Vince Young
          NHL, AHL, NFL, MLB partnerships
      Rockport line – goal was to increase sales outside of NA
          expected 50% to be generated in Europe, Asia, and Latin America by 2010
      The Reebok line
          focusing on improving image and styling
          increased distribution network – large sporting goods stores and department stores
          added 95 concept stores in 2008
          added 52 factory outlet stores in 2008
          purchased distribution rights in Russia and China (previously sold to third parties)
          purchased distribution rights for Rockport in emerging markets (previously sold to third
           parties)
          Reebok sales down 6% between 2006 and 2007
          gross margin up by 3.7% under adidas
            due to sourcing activities
            Reebok business unit operating margin up from 3.5% in 2006 to 4.7% in 2007
      TaylorMade-adidas Golf
          3rd largest producer of golf equipment
          gold equipment sales in the industry were down 5% from 2000 to 2007
            number of golfers declining in the US
            number of rounds of golf declining in the US as well
            USGA limitations limiting technological innovations
          adidas wanted to gain market share
            endorsement contracts (70 golfers)
            product innovations at defined intervals
            golf apparel and shoe sales up 28% and 18% from 2004 to 2007
            the most widely worn apparel brand on the professional tours


 adidas AG’s Performance Going Into 2009
   In 2009, signs the adidas strategy were improving financial performance
   first half of 2008 – revenues up 12%
   sales for adidas business unit growing 16%
   sales at TaylorMade-adidas golf growing by 11%
   sales at Reebok declined by 2% first half of 2008
   revenue and cost savings from the Reebok integration
       adidas AG’s gross margin and operating margin up 2.5% and 1.1% first half of 2008
       EPS up 25% first half of 2008
       increased cash flow allowed for buyback of 7.7 million shares
   expected revenue growth from the Reebok-adidas integration to result in:
       revenue growth of €250 by end of 2008
       cost savings of €105M by end of 2008
   expected China to become second largest market after the US by end of 2008
   acquired Ashworth Inc. to grow apparel sales for TaylorMade ($72.8M acquisition)
   adidas lost market share in the NA athletic footwear market to Nike through the first nine
      months of the year

				
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