Adidas Is Losing a Lot of Money, and Ugly Products Are Only Part of the Reason

After 2015 Adidas may turn bolder and more open, but first it must fix the problems that are dragging down its numbers: conservatism, slow reactions and ugly products.

In the 1970s, young people all over America showed off in sneakers with the three stripes. Remember that, and Adidas's position today looks all the more forlorn. In 2014 Adidas lost to Under Armour in North America and fell to third place for the first time. In China, it has drawn far less attention than New Balance in recent years, and the gap in brand appeal between it and its old rival Nike keeps widening.

Its share price fell 38% over the year, and it lost 140 million euros in a single quarter: by any measure, Adidas's report card for fiscal 2014 was poor. "In 2014 we had our ups and downs, and in 2015 all our brands will grow their sales," CEO Herbert Hainer said at the investor relations day on March 26, after the annual results came out. He repeated the target of 15% average annual revenue growth and 6%-9% average annual net profit growth through 2020.

Hainer, a 15-year Adidas veteran, gave no detailed plan for how to get there, but he may well be anxious. The latest sign is that Adidas has released its classic shell-toe Superstar in 50 colors all at once, which suggests the company is about to become bolder and more open.

Conservatism, slow reactions and design have long been the complaints against Adidas. But what, exactly, has cost it so much money?

How Adidas Slid Downhill, According to Its Financial Reports

In the fourth quarter of 2014 Adidas lost as much as 140 million euros. That is roughly what all the residents of Herzogenaurach, the small German town where Adidas has its headquarters, earn in nearly half a year.

The loss dragged down the whole year. Net profit of 490 million euros was down 37.7% from the year before, and even leaving aside goodwill write-downs it missed the full-year target of 650 million euros. That sounds worse still once you remember the target had already been cut once, in mid-2014.

Fortunately, group revenue still edged up, from 14.203 billion euros in 2013 to 14.534 billion euros in 2014, a 2% rise. This is the number Adidas prefers to talk about: helped by the World Cup in Brazil and the Champions League, it grew sales in every region of the world except North America in 2014.

But over the past five years Adidas's sales have gone up and down, with no handsome growth curve to show. Profit has broadly trended down: 564 million euros in 2014, below the 568 million euros of 2010.

Other Sportswear Brands Are Doing Fine

On March 20 Nike released its results for the third quarter of fiscal 2015: quarterly profit rose 17% to 89 cents a share, and sales rose 7% to 7.5 billion US dollars. CEO Mark Parker once again credited the strong growth to product innovation that leads global trends in athletic apparel and footwear.

On the news, Nike's stock jumped 4.8% in pre-market trading on the day of the report, enough to lift the S&P 500, of which it is a member. Nike's shares had earlier reached an interim high of 99.76 US dollars on November 28, 2014. Put the two companies' share price charts side by side and they rise along much the same trend, until 2014, after which the gap between them grows wider and wider.

In North America, the name that keeps coming up is another fast-growing brand, Under Armour. After 18 straight months of revenue growth above 20%, it finally overtook Adidas in the second half of 2014 to become the second-largest sports brand in the US. Under Armour's total revenue topped 3 billion US dollars in 2014, and its share price has been rising twice as fast as Nike's.

In Europe, Adidas's home base, the state of Puma, the sports brand it is sometimes compared with, can be glimpsed in the financial report of its parent company, Kering: Kering's total revenue passed 10 billion euros in 2014, of which Puma contributed 2.99 billion euros.

Look a little further back. Over the past three years Nike's profit margin averaged 10.07%, Under Armour's 6.76% and Adidas's only 4.26%. Adidas has done no better on year-on-year sales growth.

What Has Gone Wrong at Adidas?

Adidas has held on to its place as the world's second-largest sports brand, but it is beset with problems and may never return to its golden age of the 1980s. Many of the troubles it has met in markets around the world in recent years may trace back to the German company's strategic mistakes in North America:

Marketing: Adidas has recognized the importance of women customers, but on the whole it is still a traditional company that concentrates on how products are displayed and where they are sold. Nike and Under Armour, by contrast, increasingly present themselves as lifestyle brands and build closer, ongoing relationships with consumers: think of the running craze that Nike+ set off, or Under Armour using its athletic expertise to sell a premium sports experience.

Technology: Adidas releases new technologies at about the same rate as Nike and other brands, but it promotes key technologies such as Boost with nothing like the care Nike takes to introduce Flyknit to consumers;

Sponsorship: After many years in soccer, Adidas knows to sponsor the most popular European teams with the most fans, and this has brought some success. But it has not brought the same shrewdness to international events and athlete sponsorship, and so has lost a large pool of potential customers;

Store design: Adidas has learned to design its retail stores around different kinds of customers and their different tastes, a big step forward from its old model of dividing stores by brand rather than by product category;

Catching trends: Its financial reports show Adidas has started to shift some of its attention to several sub-brands built around fashion and design, but its operations as a whole remain far from the US, where trends start, and it still pays for that.

Is Inventory in China Adidas's Main Worry?

Compared with its poor showing in North America, Adidas has done well in Greater China, a market just as competitive. In 2014 its sales in Greater China reached 1.811 billion euros (about 12.247 billion yuan), up 10% on the year before. It was the fifth straight year of sales growth in the region since fiscal 2010, for a total rise of about 80%.

The inventory problem people have talked about ever since the Beijing Olympics seems to have gone away. To win sponsorship rights for those Games, Adidas spent 80 to 100 million US dollars and also made large quantities of Olympic-themed goods. After the Games, an unusually severe inventory glut put heavy pressure on the company's cash flow; the stock piled up in its warehouses was worth more than 100 million yuan. The slump lasted until 2010, and in 2009 Adidas closed more than 200 stores.

What finally rescued Adidas in Greater China was a reform plan called "Route 2015." It worked with distributors to track customer habits, which ultimately raised order volumes and sell-through rates; it redrew store planning to pay more attention to the vast markets of fourth- to seventh-tier cities; and in the relatively saturated first- and second-tier cities it invested in specialty stores for particular product categories, with stronger design and higher profits.

Yet as sales gradually recovered, Adidas's brand influence did not recover with them. New Balance offers a useful comparison. As running became the new urban fashion, New Balance running shoes became a must-have item for young Chinese consumers. From 2012 to 2014 New Balance's store count in mainland China soared from 301 to more than 1,600, and its sales grew by triple digits in two years, enough to threaten Nike, which had also spent several years working the jogging-shoe market.

As for what sponsoring major international events has actually done for Adidas (and for Nike, which always finds a way to ride on events it doesn't sponsor), look at two fairly recent ones, the London Olympics and the Brazil World Cup:

In Sportswear, Without the Young There Is No Future

Adidas and Nike both understand how much young people matter. The difference is that Adidas still uses the traditional methods: finding endorsers who look cool, or launching co-branded lines with designers, to show off the brand's personality. Co-branded lines with Yohji Yamamoto and Stella McCartney, or picking a non-athlete such as the singer Eason Chan as spokesman, worked very well in China for a while. They persuaded young consumers that Adidas without the three stripes could be fashionable too, and much of Greater China's revenue growth over the past three years came from strong sales of sub-brands such as Originals and NEO.

Nike plays a slower, steadier game: it shapes what young people buy by changing how they live. In China it sponsors marathons, organizes night runs, encourages people to log their runs with NIKE Running, and lets your friends cheer you on through the app while you run.

But the deeper problem is that Adidas has few new products for new markets, and even when it has them, they leave little impression. Endorsers alone are far less persuasive.

In an Age of Looks, There Is No Excuse for Being Ugly

With selfies and social media so dominant, sharing good-looking things has become one of the most natural things people do. Yet Eric Liedtke, Adidas's head of footwear marketing, once gave a harsh but accurate verdict on his company's designs: "Adidas is known the world over as a brand of quality and durability, but it isn't sexy enough."

He recalled that when the company invited customers to give feedback, staff asked some children: "If someone wore Adidas to a party, where would they hang out?" The children's answer was perfect: boys in Adidas would be in a huddle with other boys, talking about girls, while boys in Nikes would be with the girls.

Rather than give its products more and brighter colors, Adidas seems happier to pour research money into technology, such as upgrading Boost, its high-tech running-shoe cushioning, or developing miCoach, a wearable sensor that measures all kinds of exercise data. Nike's technologies, by contrast, are highly "visible." Flyknit, which shows right on the upper, is both a new "technology" and a new design element. The same logic lay behind its earlier choices to put the support columns of Shox, or the large air cushions of Air Max, on deliberate display.

Adidas has tried to change, as with the sneaker in 50 colors launched after its investor relations day. (Most commenters, though, said that unless you buy all 50 at once, it will only drive the indecisive to despair.) The most direct way to change its products and design style is to poach Nike's designers. In September 2014 three Nike designers left together for Adidas, and a lawsuit followed.

In its complaint, Nike said the three designers knew every design, material and apparel concept Nike planned to release over the next several seasons, as well as its athlete sponsorship plans and confidential financial information, and that Adidas could expect to copy in its own factories everything Nike would make in the future.

Fashion Means Catching the Trend, and the Trend Needs the Right People

Adidas has also realized how much it hurts to be far from the US, where trends begin. After Eric Liedtke, a 47-year-old American, became global head of brands, he moved several executives to the company's office in Portland, among them global creative director Paul Gaudio. More of the Adidas products aimed at the US market will be developed there. (Portland, incidentally, is also where Nike has its headquarters.)

"The American market shows which cool things are in fashion: sports products that blend sport and lifestyle, that are widely loved, and that are now spreading to Europe," said Bjorn Gulden, a former Adidas executive who now runs Puma.

A recent Wall Street Journal report noted that in the 1970s Adidas was far more influential in America than Nike is today, with young people everywhere wearing sneakers with the three stripes. But in 1984 Adidas made what now looks like a fatal mistake: it turned down Michael Jordan, then still at the University of North Carolina, because of his height.

Jordan soon signed with Nike, which used his performances on the court to keep widening its product lines and, by the 1990s, had secured its place at the top of the market. By 2005 Adidas's share of the North American sneaker market had fallen to about 10%, while Nike's had climbed to 35%.

The two companies' standing in basketball also shows in the number and caliber of the players they sign. According to Business Insider, Adidas has 70 NBA players under contract, very few of them top stars; Nike has 283, including more than a dozen top stars.

Riding the Trends: The "Hits" Adidas and Nike Have Each Produced

Basketball and running are also the two fields where Nike has produced the most "hits" in recent years. The three lines named after NBA players, Jordan, Kobe and LeBron James, sell strongly year after year, while running serves as a testing ground for technologies such as Free, Air, Lunar, Vomero and Flyknit. Almost every product launched with a marketing campaign behind it wins consumers over.

According to figures in Adidas's 2014 annual report, the best-selling shoe in the company's history is the Stan Smith, reissued and relaunched in 2014, with total sales of more than 40 million pairs. That is a little surprising, since the classic "shell-toe" from the Originals sub-brand had always been seen as the only Adidas "hit" that could rival Nike's retro Air Force line.

In Adidas's financial reports, the Trefoil line goes by a more formal name: Adidas Originals. The Trefoil brand was launched in 1972, when every Adidas product carried the logo. Since 1996 the Trefoil has been reserved for the classic Originals line, which reissues the best products in Adidas's history with slight changes to fabrics and styles.

The Trefoil was once the brand Adidas used to signal premium, trendy style. But in recent years the bet group CEO Herbert Hainer has been keener to make is on another sub-brand, NEO, positioned between Adidas and the Trefoil. NEO targets 14- to 19-year-olds, with more fashionable, casual designs and friendlier prices, roughly half of Adidas's. That puts it within about 100 yuan of local Chinese sports brands and makes consumers far more likely to choose it.

With NEO, Adidas has also tried to speed up production so its products keep pace with trends. A traditional Adidas product takes 18 months from sketch to store shelf, which is too slow for today's global market, where people want sportswear they can also wear every day.

At its investor day on March 26, Adidas said that over the next five years NEO's speed will be the model for the company's strategy and will be extended to every brand in the group; that six cities, Los Angeles, New York, London, Paris, Shanghai and Tokyo, will be priorities, each with its own marketing strategy; and that product design will draw more on input from consumers, athletes and partner brands.

As a Group, Adidas May Also Have to Rescue Its Acquired Brands

Adidas has owned three of its brands for many years: Performance, Originals and NEO. The three it acquired, Reebok, Rockport and the golf brand TaylorMade, are in a very different position: all of them are struggling to be noticed.

Reebok, bought in 2006 to expand in North America, has grown sales slightly but steadily over the past five years. But it was too hard to tell apart from Adidas and did little to complement it, so in 2013 the group repositioned it as a brand focused mainly on fitness, which meant its main rival suddenly changed from Puma to Under Armour;

Rockport, also acquired by Adidas in 2006, is known as the "White House shoe," and former US presidents Carter and Bush once appeared in its ads. In the eight years Adidas owned it and ran it as an independent brand, its annual sales declined steadily. It was finally sold in January 2015 for 280 million euros, and its sales for the previous year were left out of Adidas's financial report;

TaylorMade, a golf brand few Chinese consumers know, became the group's weakest brand after Rockport was sold: although it kept sales revenue above 2 billion euros in 2014, its sales volume fell by a full 28%.

Adidas also has to ask whether this multi-brand strategy is worth anything. Either way, the Adidas name is losing its appeal to young people, and it has little time left to fight back.