Thesis on "Adidas Group Is a Multinational Sportswear Manufacturer"

Thesis 8 pages (2248 words) Sources: 1+

[EXCERPT] . . . .

Adidas Group is a multinational sportswear manufacturer based in Bavaria. They operate three main business units, including Reebok, TaylorMade-Adidas and Rockport. The company competes primarily in the athletic apparel, footwear and golf equipment markets. In 2008 the group recorded sales of €10,799 million and a profit of €644 million (2008 Annual Report). This performance represented an improvement, although the Reebok unit suffered losses and the company's revenue streams came under downward pressure as a result of declines in athletic goods spending over the course of the year. This paper will examine the Adidas group and its performance drivers. Thus, not only will the financial performance be examined, but the firm's technological performance, its response to changes in the economy and the company's organizational structure will also be analyzed. This will lead us to a conclusion with respect to the short- and long-term trading future of the Adidas Group.

Organizational Structure and Culture

The Adidas Group maintains its head office in Germany, but maintains a strong presence elsewhere with respect to its subsidiaries. The golf unit, TaylorMade-adidas, remains headquartered in California. Reebok is headquartered in Massachusetts. Each of these companies operates with relative independence. The Reebok brand was acquired in order to help Adidas compete with Nike in athletic shoes and apparel. The brand has been subject to a repositioning effort to avoid direct conflict with the Adidas brand. These efforts have ultimately left that brand exposed to economic uncertainty compared to the other brands. Each of the other units operates with independently, with nominal group control, giving the company a divisional structure (Ibid).

Within each operating company, there are multiple units, creating a matrix structure. There is a focus with respect to distribution and sales on different geographic regions. Product development, a significant source of competitive strength for Adidas, is conducted on a sport-by-sport basis. Each sport's products are then subject to an overarching marketing strategy that spans across the different countries. Sponsorships with top athletes and teams are used to promote the brand on an international basis. While national strategies still exist, for example with national cricket teams (IndianTelevision.com, 2005), these strategies work in concert with the overarching strategy, completing the matrix structure that exists within the major groups. The TaylorMade business is not structured as a matrix, given its focus on golf and the U.S. market.

The organization retains a fairly informal culture, the result of operating in the sporting business. Dress codes, for example, are relaxed as employees typically wear Adidas athletic shoes. The company's culture otherwise retains the formality and directness typical of German firms. Hierarchy is clearly delineated, but superior-subordinate relationships are relatively informal. The company has a strong orientation towards excellence. Its marketing programs hinge on sponsorships with top athletes and the firm expects its own employees to perform to an equally high level.

Human resources is an important function for Adidas, mainly with respect to its marketing function. Marketing drives the business and therefore it is essential that the company attract and retain top marketing and sales talent. To this end, the utilize the informal but competitive corporate culture as a tool to attract the talent they seek. They operate offices around the world, providing significant opportunities internally for top talent.

Technology

The apparel and sportswear businesses are driven by marketing, design and fashion. The latter two are often tied together. Technology involves improving performance, be it with respect to weight, absorbency or other performance factors. The company ties this to fashionableness in its apparel, in order to increase the attractiveness of its products in the global marketplace. The marketing function then supports this.

Adidas, however, has tended to focus the technology aspect of its business on a handful of high-profile developments, rather than developing the use of technology as a key source of competitive advantage. In 2008, for example, research and development expense was just €81 million, compared with marketing and sales expenses of €2,984 million. So while the company makes headlines, for example, for making a shoe with a microchip embedded (Bajak, 2005), such developments are used more for publicity purposes than to actually trade on technological development.

Response to Economic Issues

Despite the onset of global recession in 2008, Adidas was able to record improvements in revenue and profit. However, its premium pricing has exposed it to such downward cycles. This is best evidenced in a year over year decline in Q1 results. Revenues in Q1 2008 were €2.621 billion and for 2009 they were €2.577, a decline of 1.6% (Reuters, 2009).

The economic weakness did not in 2008 impact the company's performance. Management credited operational efficiency for superior performance in 2007 but conceded that the incremental gains from such operational excellence could not offset the onset of recession and the highly volatile financial markets. The share price for Adidas declined 47% in 2008 while profits increased 16.5% and its earnings per share increased 19.68%.

This year, the weak economy appears to have caught up with Adidas somewhat, as the firm's sales have declined in the face of exceptionally weak retail sales figures from the U.S. And other key markets. As a result, Adidas is likely to experience weak figures for fiscal 2009. The economy impacts Adidas business in large part because the firm must convince consumers to pay high prices for its apparel. The firm has generally remained successful at this, but the overall sales for apparel and consumer spending in general have slumped too much for Adidas to overcome. There is little Adidas can do except focus on market share over sales growth and take steps to control costs.

Success Factors

The marketing budget is the single largest expense for Adidas. The firm uses marketing in several ways. The first is to build the brands. In this respect, Adidas focuses more on building brand loyalty and attracting new customers than it does attempting to position the brand away from its main rivals. The Adidas brand, for example, competes directly with Nike to the extent that Adidas set up its U.S. headquarters in Nike's hometown of Portland. The brands are marketed towards a premium position that allows the company to recover high margins for its products. The business model is built around high marketing expenses and low production costs. The high margin, high-volume model requires this premium pricing in order to succeed.

Brand equity for Adidas is not a source of competitive advantage, as this competency is shared by major rivals, Nike in particular. Adidas does, however, consider the strength of its brands a core competency. As a consequence, the company's marketing efforts support the brand message. Reebok, for example, is positioned as a brand reflecting individuality (Associated Press, 2006).

Financial Performance

Overall, Adidas has experienced strong financial performance in recent years. The company was essentially restructured in the middle part of this decade with the divestiture of Salomon and the purchase of Reebok. This brought the firm's focus back towards its core activities and away from winter sports, where it is generally weak and where its core competencies cannot easily be applied.

Adidas has grown revenues 7.1% since the Reebok deal was finalized. Net income over that span has improved 32.9%. This has come as a result of cost savings attributable to this renewed focus and the integration of Reebok into the Adidas family. Operating expense has only grown 5.7% in the past three years. The company has also improved its margins as well. The gross margin for 2008 was 48.6%, compared with 44.5% in 2006. The improvement in net profit margin is directly attributable to a strong program of cost cutting in the wake of the Reebok acquisition.

Since the Reebok acquisition, Adidas has suffered a decline in liquidity. The current ratio dropped from 1.6 to 1.35 over that span. The firm's debt to equity ratio has improved from 1.96 to 1.81, however, as the firm pays down the long-term debt that it acquired as result of the purchase. While the firm's liquidity position has weakened, Adidas is still a very liquid company. While its debt load is high, much of that comes from Reebok and a plan is in place to reduce this debt. Therefore, there is little cause for concern over the company's ability to meet its obligations.

Short and Long-Term Trading

The Adidas share price closed June 18, 2009 at €26.81 on the Xetra (German) exchange. This represents a 26% improvement over the 52-week low, recorded in November. This is, however, dramatically lower than the 52-week high of €44.78, which was recorded last summer. Even these depressed levels reflect reasonable expectations of success, with a multiple of almost 12. Adidas trades with a beta of 1.04, meaning that its performance is highly correlated with that of the market in general. As such, its collapse last fall is attributable more to the market troubles than to the performance of the firm itself.

Indeed, Adidas has outperformed the economy and is only now showing signs of weakness. In the short-term, however, Adidas is likely to track… READ MORE

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