Market Strategy of Adidas and Reebok - Term Paper Example

 Addidas and Reebok Market Strategy Report Executive Summary The takeover of Reebok by Adidas produced mixed reactions in the financial markets. Some consider it a good strategic move whilst others are yet to be convinced. The purpose of this report is to consider the validity of both arguments. As a base from which to form a constructive evaluation we studied the history of both companies and the marketplace within which they operate, both in terms of size and the competition. In addition we have undertaken research into the business strategies of both businesses pre-merger together with the combined future strategy, which the new business envisages. Bearing in mind the current position reached in the cycle of globalisation in general, and the sportswear and equipment industry in general, it is our conclusion that the take-over/merger of these two businesses was the correct strategy to adopt. Our findings are based upon the current and future development of the industry. We also reflect upon the impact and possible threats that outside elements may pose to both the industry and, in particular, the organisation being studied. Addidas and Reebok Market Strategy Report 1) Introduction Adidas-Salomon AG formed Adidas-Reebok in January 2006 as a result of the acquisition of Reebok International Ltd. The purpose behind this was to reinforce the company as a global player in the sportswear and goods industry and to give it a stronger and more in-depth and diverse promotional and customer base across a number of sports and competitors. At the same time it expands their product range and enabled it to increase market share. There has been mixed reaction from some elements of the financial markets to this takeover. Whilst it has generally been accepted as a logical step, there is a small section of the financial community who feel that, with the cost being 18.5 time earnings, before any savings can be achieved, this is a very high price to pay, especially as it also represents a 40% premium on the share price, (John Spakak 2005). The concern is centred around the perception that the company may not be able to service this financing. Within this report we intend to evaluate this position and endeavour to identify the reasoning behind Adidas actions in the takeover of Reebok. a. History Reebok is the older of the two businesses by about thirty years, being started in the UK in the 1890’s. It was amongst the first to make footwear for athletes. In 1979 its business expanded into the U.S. In 1981 the company sales exceeded $1.5 million. 1985 saw the company being floated on the stock markets and in the latter part of the year the company expanded into overseas markets, where it now sells products in over 170 countries (www.Adidas.com 2006). The company was taken over by Adidas at the end of January 2006 in an agreed €3.5 billion bid. Adi Dassler created Adidas in 1920. In 1949 it’s trademark three stripes were first registered. By 1960 75% of all athletes at the Olympics were wearing Adidas products and ten years later the world cup saw the introduction of their first none clothing products such as footballs. In 1978 Horst Dassler took over the business after the death of his father. In 1989 the company became a corporation and in 1993 Robert Louis-Dreyfus became president of Adidas AG. 1998 saw Adidas become one of the top 30 company’s in Germany, in 1999 exceeding DM10 billion for the first time. The company continued its growth pattern in the early 2000’s, in 2001, the same year that Herbert Heiner became CEO, again setting record revenue at €6.1 billion and it’s shares outperforming the German index by 48%. 2005 saw the sale of its under-performing Salomon sections, an organisation that it had acquired previously, paving the way for it’s €3.5 billion takeover of Reebok International. The company now employs more than 25,000 employees worldwide. To support its global market share it has in excess of 80 subsidiaries through which it operates, with four major distributions and sales networks. These are Europe/Emerging Markets, North America, Asia/Pacific and Latin America. (www.Adidas.com. History 2006) b. Products Part of the reason for the success of both Companies is their continuing innovative development is terms of the product range and scope. From Reebok’s early years when it introduced spiked running shoes, to its introduction of products into the North American market in 1982. At the time they were, at $60, the most expensive running shoes on the market. It was also the first company to introduce shoes designed specifically for women athletes. Continuing it’s innovative approach the company began to develop footwear for the general public in the early 80’s. In the late 1980’s Reebok invented the Pump® technology, creating a shoe with a unique inflation mechanism for adjusting the internal air cushion. The company has also expanded into the production and sale of sporting clothing and equipment such as bicycles and, hockey sticks and other accessories. Similarly Adidas has been creating its own share of innovative products. It was the first company to make sports shoes of canvas and rubber after World War II. The company began to develop shoes for a range of sporting disciplines, including productions of tennis shoes in 1931, and removable stud track shoes in 1952. 1950 saw the introduction of the “Samba” all round training shoe, which is still regarded as a classic shoe product. Adidas also produced a unique system called Torsion®, which is a mid-foot stability system. In 1963 to 1967 the company began to develop other sportswear and equipment, with the production of footballs. In 1978 all the World Cup goals in Argentina were scored using an Adidas ball. In addition to Athletic and Football products, Adidas also produced the boots that were worn by both participants in the famous Mohamed Ali – Frazier fight. Product innovation continued in the 90’s and 00’s with the introduction of the revolutionary Predator® football shoe range and in 2002 the ClimaCoolTM constructed with a 360o ventilation system. In the last few years’ development in shoe wear has continued with PowerPlusTM a technology, which works on the basis of distribution of mass. It was not only shoes that saw such innovation for Adidas either. In 2003 they introduced their “JetConcept” bodysuit for swimmers, a new and unique style of sports clothing. In terms of price, Adidas-Reebok products are, from a personal observation and survey of around 25 people, situated between Nike (the most expensive), and Puma and others. This is certainly true in their high tech products, although it should be noted that they also have a range of lower end market products that are more price competitive. From a visit to high street stores over the last few weeks it is apparent that the sports clothing market section of their products tends to be evenly priced in comparison with others. This is particularly true in the case of World Cup items. Most manufacturers have a very similar range of products, including sportswear, sports clothing, other apparel and accessories. Similarly manufacturers such as Puma are entering into the sports equipment production area of the industry. However it is generally considered that, a fact confirmed by on-line reviews such as www.zappos.com, the quality of Nike and Adidas products is superior to most of the others, save perhaps for the Puma brand which is also beginning to make an impact. Generally it appears that the industry players are more inclined to compete on price and the “big named” stars who promote their products, than the product itself. However during the weeks prior to the writing of this report, May 2006, Nike has announced the introduction of the “Air Zoom Moire” range. This footwear allows connection to an ipod for the purpose of communicating workout information such as time, distance, pace, calories burned, as well as being able to play music. The information is displayed on the ipod screen as well as communicated to the wearer via headphones; alternatively it can be downloaded to a computer if the user wishes to create a diary log for health purposes. (Nike press release 2006) Set for launch in July 2006, this innovative product, linking itself with the latest music-listening equipment craze that is taking hold of the younger generation, may give Nike a product edge for a while. Nevertheless that edge will give help to consolidate its market share. c. Market & Competitors Athletic footwear and sportswear is a growing Industry. In 2003 the industries global revenue amounted to $145 billion. According to a report published by Research and Markets (2004), this meant that “US$ 23 was spent on behalf of every man, woman and child in the world.” Over the past thirty years the industry has seen a rapid expansion in terms of size. There are a number of key factors that can be attributed to this. Firstly in the early 1970’s the world witnessed the beginning of the information technology era. This bought about the liberalisation of communication. With the birth of the Internet international communication expanded dramatically. Citizens of all nations grasped this opportunity to create a worldwide community environment, free from national boundaries. Commercial organisations soon recognised the opportunities that this development afforded them in terms of e-commerce, international markets, revenue and profit. The development of commercial Globalisation and the rise in the number of transnational organisations soon followed. From the sportswear industry point of view the global expansion of the media was most significant element, followed by the opening of new markets for labour force. In the wake of technology developments, the media expanded rapidly. Television, radio and other broadcast media quickly adopted a multi-national, multi-channelled approach. For the sportswear industry the development of satellite TV with organisations like Sky® at the fore, especially in terms of their multiple sports channels, revolutionised their marketplace. Audiences for popular sporting events, which on land based channels attracted numbers of low millions, could now be viewed by a global audience, sometimes in their billions. What had previously been considered to be fringe sports such as bowls, squash, darts etc., were screened because they could now reach respectable global audiences. Leading market players such as Adidas, Reebox and NIKE recognised the significant rise in product demand that this could trigger. The additional bonus of globalisation, and the consequential disappearance of national borders and barriers, was that it assisted in the development of third world countries. The result has been a huge increase in the low cost labour force potential, which the sportswear industry has swiftly garnered. This meant they could produce much higher levels of products at lower costs. Restructuring the businesses in this manner achieved substantial cost reductions. Using the addition cash flow that this provided, the corporations could concentrate their efforts into the construction of a more globally focused sales and marketing program. Adidas, Reebok and Nike were amongst the first to recognise and take advantage of these developments, hence the reason for their market positions. Nike is still the largest corporation with in the sportswear and apparel industry with Adidas second. Since its takeover of Reebok, Adidas has closed the gap on Nike in terms of revenue to under a 10% differential. These two are recognised in some reports as the “A” team in terms of sportswear manufacturers (Clean clothes campaign 2004). Together with other manufactures, as listed by Hoovers (see tables 3 and 4), they represent the key players in the industry as of 2004. The respective market share of the top six, based on the 2003 global figure quoted above is: - Company Revenue (000) Market share (%) Nike 13,739,700 9.48 Adidas-Reebok 12,621,000 8.70 Puma 2,087,300 1.44 Rossignol 1,444,200 1.00 Fila 955,200 0.66 Umbro 266,900 0.18 Between them, these companies have nearly 21.5% of the market place. However, if one concentrates solely on branded footwear, Nike and Adidas-Reebok between them account for 60% of the market share (see table 6). If the 2006 World Cup were a guide to the prominence, present and future, other emerging competitors in this industry would include Lotto, Marathon, Joma, Kappa and Basics. d. Developments As outlined within the history section of this report, both of the companies that now form Adidas-Reebok have concentrated a lot of effort on the development of their products. In the initial stages of development this effort concentrated mainly on the design and general comfort of the product. However in more recent times the companies development, particularly in the sportswear area, has concentrated more heavily on the physical aspects of the product in terms of encompassing its purpose and understanding how it can best benefit the user and enhance their performance. Prior to the developments, enhancement of performance had been concentrated more upon the design of equipment. For example a lighter bicycle will go faster than one that is heavier and a similar reaction can be expected with the weight of a football. Similarly the shape and texture of the material content of a racket, hockey or bat will enhance the durability and effectiveness of that item of equipment in the right hands. Both Adidas and Reebok have been involved with this with this development, in Adidas case mainly in the football and tennis area, whilst Reebok has worked in sports that have less mass appeal such as hockey. However, over the past few years, the development side of the product has been concentrated more in the area of footwear and other sports clothing, developments that will benefit the individual in terms of performance and skills, rather than improve the tools of their trade. Sports footwear and clothing is a classic example. Adidas have introduced some innovative systems to enable more comfort in this area for the user, systems such as the cushioning effect, which will reduce the runners, or players fatigue levels. As has been mentioned earlier Nike has taken this to another level by incorporating a physical monitoring system that informs the user of the physical affects of their efforts in areas such as heartbeat. Similar developments have taken place in other items of clothing. The JetConcept® swimsuit recently produced by Adidas is specifically designed to reduce friction and drag whilst in the water, thus allowing the swimmer to achieve improved race times and make them more competitive. Unlike drugs, which are designed to increase physical body performance beyond the norm and thus advantage those who participate, the developments in products made by Adidas and others are designed to allow the wearer to maximise their existing physical performance by reducing the inhibitors such as stress, strain, fatigue and incidence of pain. The other area of importance in terms of development for Adidas, as indeed it is with all their competitors, is the sales and marketing strategy. Adi Dessler, the Adidas founder, recognised very early in his business career the benefit of user recommendation, especially when that user was renowned or famous. The strategy of sports personality endorsement of its products has paid dividends in the past for both Adidas and Reebok and continues to do so, as indeed is has and does for an increasing number of their competitors. Despite the multi-millions spent on these contracts they do produce an added value in terms of the company’s revenue. One only has to mention on TV in the UK that David Beckham is sporting the latest “Adidas” design to find hundreds of thousands of school children, teenagers and even adults rushing out the next day to purchase the same item. It is in the marketing area that Adidas and Reebok had slightly differing focuses prior to their merger. Focus which, as a combined organisation actually complements each other. Adidas, in order to improve its product design and extend the appeal to the general public marketplace, has recently begun to form partnerships with “known” people in areas other than sport in order to achieve this aim. For example a range of clothing designed by Stella MacCartney has recently been added to its products and the company is looking at similar ventures with other top designers, (Juilia Boorstin 2005) Reebok, on the other hand, had taken a different direction. Acknowledging the influence that music has on peer pressure, particularly with the younger generation, it has focused it’s promotions in the general marketplace on this aspect, engaging the services of such pop and rap idols as “50-cent” to promote a new product range and brand image. Both of these routes are proving to be highly successful. The natural extension of these marketing strategies has been for the companies to seek deeper involvement within the structure of the sport itself. This has been achieved in a number of ways. Both Adidas and Reebok have become involved in the sponsorship of their respective sports at various levels. Adidas has done so by sponsoring football teams and tournaments, together with tennis. In fact the company has even taken a 10% financial stake in the German premiership team Byern Munich. Reebok, with its involvement in hockey and baseball has followed a complimentary route as well as sponsoring pop concerts. These sponsorships are now being extended to include the TV coverage of such events. Many of the companies competitors have also used marketing routes similar to Adidas, some being more recent entrants than others. Surprisingly it is only fairly recently by comparison that Nike, the industry leader, entered this arena, initially having a preference to rely upon the volume of direct sale and sales marketing. A prime example of this brand involvement in sport can be seen in the example of the World Cup, being held in 2006. The sportswear and equipment manufacturers are heavily involved. In this event Adidas is both the main FIFA sponsor and provider of the official footballs, a prestige position for the company to be in. Added to this is the industry involvement at team level. Kit sponsorship deals from industry organisations are spread around the 32 teams involved, (Richard Milne 2006). Organisation Teams sponsored Nike 6 Adidas-Reebok 6 Puma 12 Lotto 2 Umbro 2 Marathon 1 Joma 1 Two areas of concern should be mentioned to Adidas here. The first is that 1962 Adidas shoes dominated the World Cup, being worn in all 32 games. The second concerns the strategy that Puma has used for the World Cup. For once it appears that they have an advantage over the two market leaders, NIKE and Adidas. Firstly, as a result of securing the deal with 12 teams, they had put themselves in a position of having a promotional presence in at least half of the games. Secondly, and perhaps more importantly, is the fact that amongst those teams are included all of the five African sides. This is an exceptionally good piece of marketing strategy considering that the next world cup will be held in South Africa in 2010. (Richard Milne 2006) 2) Strategy & Analysis Within this section of the report we intend to study the current position of the industry, take a more in-depth look at the formulative strategies Adidas has used to achieve their successes and current position, including those areas in which they are achieving continued successes over their competitors. We will also consider how the competition is reacting to this in an effort to evaluate the areas that could cause concern to Adidas in the future. All industries, and corporations, have a life cycle and the sportswear industry is no exception (see table 5). The early 1900’s heralded the start of the modern era of international sport and both Adidas and Reebok were fortunate enough to be in at the start of this particular cycle, At that stage it would have been easier to enter the industry because there were fewer competitors, less of a global brand identity situation than today, a smaller market place and the cost of coverage was primarily limited in area to ones own nation. All of these would necessitate much lower initial investment than would be the case if entering the market today. It follows that because Adidas and Reebok had both been there during the birth and growth periods, both benefited from it. The question is at which stage of the cycle does the industry find itself at this moment in time. In a normal environment, one would say the maturity stage would be inclined to last for quite a long time. However, the expansion of the global media over the past thirty years, linked with the expansion of globalisation generally, may have altered the pace somewhat. Technological advances in that period have increased at a rate previously unheard of and the same has happened to business growth. To use Adidas as an example one only has to consider the number and timescale of recent innovative products. Such innovation, which prior to the 1970’s would have lasted for a four to five year life cycle, now is obsolete within two years at the most. A classic example in the football world is national team strips. In the past these would last for years. Now there is not only a new strip for each World Cup but in Europe at least, for every European cup as well. It follows that the life cycle here is no more than two years. This scenario has a dramatic impact on organisations such as Adidas. They are faced with a situation where they have to achieve growth and increase market share, whilst at the same time be constantly reacting to the changing product demands. In an interview with Julia Boorstin (2005), Herbert Heiner, CEO stated that Europeans purchased 1.5 items of footwear per annum and in the USA they purchase 6-7 per annum. From this it can be deduced that in these two markets the only expansion is achieved either by a continual stream of new products or securing market share by another route. Globalisation has provided part of this new route, but even here, with the speed of growth dictated by the media, this market is rapidly approaching saturation point. When that happens, there follows a natural decline. Such a decline will affect both the industry itself and the organisations that operate within it. In an effort to extend and, in some cases even create a new life cycle, Adidas has used a degree of diversification as an extra marketing and sales tool. By careful planning and use of unique resources, such as renowned fashion designers, it has expanded its products market from the narrow confines of an athletic only environment, to the general public arena, where the scale of potential sales increases dramatically. It has achieved this transition by using a mixture of hero recognition, via sponsorship contracts with personalities such as David Beckham and well-known experts in their field, including Sara MacCartney. In an additional move to capture market share, the company also took the unusual step of entering the media itself, creating a soap programme, which very much mirrored the company in real life. This action in itself shows the innovative nature of the Adidas management. Such moves have allowed the company to expand both its marketplace and customer base, allowing it to sell products to a more discerning customer as well as the traditional football and sports fan. A further way that Adidas is expanding its market share is by investing in emerging markets in a significant manner. The management has been quick to recognise the potential of the Chinese market place, whereas others have been reluctant due to the political situation. Adidas already has 1,500 stores and is planning to open at least 40 more. With over a billion people in that country it does represent a significant new market. This is just one of the emerging nations that Adidas-Reebok is developing its network into. However, like all other corporations the board of Adidas has a continuing responsibility to return value and cash for its shareholders and stakeholders, and that return is require to see a year on year real increase in financial terms. The increasing difficulty they face is how to achieve continuity of these results, especially in a market or group of markets that will eventually reach saturation point. The company, in purchasing Reebok, took the route of buying both market share and revenue. An added benefit to this purchase was that they also secured a new market and a wider product range. There are two other ways the Company has looked at horizontal rather than vertical expansion. One is by moving into the marketplace for sports equipment. Here it has not suffered the normal market entry difficulties that a totally new business would. The fact that it was already connected with sports people and had built an enviable reputation in that field did much to ease its entry into the equipment market. In theory the position envisaged above should also affect other players within the industry, certainly those who hold a lesser market share. However there is also an exception that proves the rule, as the example of Puma outlined earlier indicates. The difficulty is that major players do tend to become complacent, or become so obsessed with being number one that they forget to concentrate on their main aim, to grow the business. There are signs of this with Adidas-Reebok and Nike. In early June 2006 there was a public battle between the two organisations regarding, which was number one in the football market, with each company accusing the other of lying. (Richard Milne 2006) As a result of the current conditions in this industry, there is a train of thought would suggest that it could act as a deterrent for future businesses to join. In practice this is not necessarily the case. It is true that for any organisation considering entering into this industry from scratch, there would be some major hurdles. The brand images created by Adidas-Reebok, Nike, and others are powerful and dominant. Loyalty to a brand is a very difficult barrier to breakdown. One cannot image a UK premiership team agreeing a sponsorship contract with an unknown entity. Additionally, they have the advantage of size and market share. It is far more difficult for a new player to take market share from an existing corporation than it is to create it from a new market. Another barrier to entry would be the existing industry corporation. Despite all the regulations to protect freedom of trade, dominant corporations do not react positively to threats to their market position. Recent court cases involving Microsoft and other large conglomerates regarding antitrust breaches confirm this statement. The only realistic threat from a newcomer would be if that newcomer were a Transnational from another industry, which having exhausted their own marketplace needed to expand into other areas. In this respect an organisation of the ilk of The News Corporation, run by Rupert Murdoch, would be a prime candidate as the sportswear industry complements its Sky® sports coverage. 3) Conclusions & Future Outlook The sportswear and equipment industry does have a reasonable amount of growth left in it, but this is mainly concentrated within the emerging nations sector of the marketplace. Places like China, other Far Eastern and African countries offer possible opportunities for expansion for the next decade, but even these countries are developing at a fast rate, having the advantage of a globalised market to grow in. The difficulty with the marketplace within the developed nations is that it is fast approaching saturation point. Football is a case in point. In the UK and other European countries, virtually every club and national side has a sponsorship arrangement. The market is finite. The number of games and competitions cannot be extended because of the physical demands on the players. Other sports, such as cricket, Olympic field and track events and tennis are rapidly approaching a similar position. This is the reason behind Adidas-Reebok, Nike and others expansion into the general clothing market. Initially this took the form of just offering sports orientated footwear and clothing to the sports fan base, of which there are millions worldwide. However in recent years Adidas-Reebok and the others have even moved away from this bias, now offering for sale products of a more general nature. Based on the research which we have undertaken during the compilation of this report, the conclusion we have reached is that the takeover of Reebok by Adidas was a shrewd move. Not only do the two businesses have a lot of synergies, many of which have been included within this report, but together they have expanded both the market share that the joint venture holds and raised the possibility of additional revenue from the cross-selling of brands to the customer of the other. It is our opinion that, within the next decade, the industry will undertake a period of consolidation as more of the corporations take the lead from Adidas and look to achieve growth of market share through acquisition. The concern that this would cause to Adidas-Reebok itself is that, if they do not keep an eye on this position, and are willing to consider further possible acquisitions themselves, they may find that other players become a threat by their activities and acquisitions. Puma has already shown that it has the ability to react to potential possibilities. However it is necessary to issue a word of warning. Not all takeovers and mergers work. Adidas is aware of this with the position that occurred with Salomon, a previous acquisition which it subsequently sold off. Incorporating another business into an existing business is never easy and one has to guard against the problems that present themselves. Integration can lead to a decrease in revenue if not managed efficiently. Tables The Irish drinks group C&C shone with a 13 per cent increase in profits yesterday, thanks to booming sales of Magners, the cider brand it is rolling out across Britain. Shares in C&C, which have doubled over the past year because of the growth of the cider business, climbed 6.4 per cent to €6.70 (£4.6m) yesterday. Since its launch in Scotland in 2004 and London last year, Magners has captured 0.5 per cent of the British beer and cider market and is expected to double its share this year, backed by a €30m (£21m) advertising campaign. That is more than double the amount spent on previous marketing campaigns in the UK. The group will also put €50m towards doubling its cider-making capacity. Article Length: 263 words (approx.) Table 1 5-year share performance - Adidas Table 2 5-year share performances - Reebok Table 3 Reebok Financials 2004 Company Type Subsidiary of adidas Fiscal Year-End December 2004 Sales (mil.) $3,785.3 1-Year Sales Growth 8.6% 2004 Net Income (mil.) $192.4 1-Year Net Income Growth 22.3% 2004 Employees 9,102 1-Year Employee Growth 17.3% Year Revenue Gross Profit Operating Income Total Net Income Diluted EPS (Net Income) Dec 04 3,785.3 1,536.9 294.4 192.4 3.05 Dec 03 3,485.3 1,373.8 252.4 157.3 2.43 Dec 02 3,127.9 1,202.1 Fila USA NIKE PUMA Annual Sales 955.2 13,739.7 2,087.3 Employees -- 26,000 3,910 Market Cap ($ mil.) 0.0 20,880.8 0.0 Table 4 Adidas Financials 2004 Company Type Public (OTC: ADDDY [ADR]; German: ADS) Fiscal Year-End December 2004 Sales (mil.) $8,836.1 1-Year Sales Growth 12.3% 2004 Net Income (mil.) $428.6 1-Year Net Income Growth 31.3% 2004 Employees 16,342 1-Year Employee Growth 4.2% Year Revenue Gross Profit Operating Income Total Net Income Diluted EPS (Net Income) Dec 04 8,836.1 4,171.4 791.4 428.6 -- Dec 03 7,866.2 3,531.8 615.1 326.5 -- Dec 02 6,837.2 2,954.8 499.5 239.6 Amer Sports Rossignol NIKE Annual Sales 1,444.2 13,739.7 602.7 Employees 4,066 26,000 2,902 Market Cap ($ mil.) 0.0 20,754.1 0.0 Table 5 Industry life cycle Table 6 Branded footwear 2003 References Report (2006) Global Market Review of Active Sportswear And Athletic Footwear – Forecasts To 2010 Research and Markets, Dublin. 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