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Hot on Nike’s Heels

4 minute read

When Adidas-Salomon reported its second-quarter results last week, the German maker of sports shoes and apparel exceeded most analysts’ predictions. Sales increased by 10% in the quarter to $1.25 billion, while profits were up 22%. So why was Herbert Hainer, who took over as CEO of the Bavarian company in March, not entirely a happy camper? The answer lies in the U.S. market, the world’s largest for sporting goods, where sales fell about 13% in dollar terms. “Even in the tough environment in the U.S. there are winners and losers,” says Hainer, “and we want to be a winner.”

In the U.S. race, the clear No. 1 is Nike, with a 37% market share. To break out of the pack (Adidas, Reebok and New Balance each have a 11% share), Hainer has installed Ross McMullin, a former exec at razormaker Gillette, as head of U.S. operations. Adidas has a raft of innovative new shoes coming out, starting this autumn. It is also focusing sales on more upmarket stores than in previous years, when it depended on mass-market, high-volume sellers. “The North American market is slowly beginning to turn for us,” Hainer says. He predicts the company’s U.S. market share will jump to 20% in three years.

It was just three years ago that Adidas limped along with only a 5% share. “Adidas was not seen as cool,” concedes Hainer. “Design was not up to speed and not up to the competition.” One painful result: the company’s stock price, which reached $143 in 1997, skidded to $47 last year. The stock has since bounced back to $66, near its 52-week high, but success is never guaranteed when it depends on fickle urban American teenagers to set the trends. “Adidas had a hot spell with this whole image thing, but now it’s having a cool spell,” says Bob McGee, editor of Sporting Goods Intelligence, an industry newsletter. “They are developing new plans, but we haven’t seen the signs that they are off the mat.”

That depends on your perspective. Adidas is in far better shape than in the early 1990s, when it veered toward bankruptcy under Bernard Tapie, the French politician who served five months in jail in 1997 for fixing a soccer match. Tapie had bought the company from the daughters of Adi Dassler, the “Adi-Das” who invented cleated shoes for soccer and founded the company in the 1940s. Adidas dominated the sports-shoe business until the 1970s, when a new firm called Nike began selling shoes in the U.S. With the novel idea of manufacturing in low-cost countries like South Korea and Indonesia, Nike sprinted past Adidas. That hasn’t changed much, even though Adidas is imitating its rival’s production practices: Nike’s last-quarter profits were $163 million, dwarfing Adidas’ $21 million, though it has also felt the pinch of the current slowdown, having slashed ceo Phil Knight’s annual bonus last week in response.

Adidas remains strongest in Europe, where it gets more than half its annual sales. It’s a sponsor of the soccer World Cup, is endorsed by Swiss tennis star Martina Hingis and has a long-term relationship with its customers in other sports like track and field. While sales in Europe were up 8% in the first half of this year, the strong dollar was a problem — the company buys its products in Asia for dollars, but gets back weaker euros in sales.

The company is counting on new products to sustain a 3-5% annual growth rate. In November, Adidas will introduce a new basketball shoe named after Los Angeles Lakers’ star Kobe Bryant. It is also reissuing some successful designs from the past in its “Originals” collection. In New York City, there is so much buzz about the Adidas Italia that Barney’s, the trendy Manhattan emporium, already has a waiting list. Next year, two entirely new models are set to debut: the Climacool and the a3 (pronounced A-cubed), embodying the first technical innovations from the company in four years. Adidas claims Climacool can reduce foot sweat by 20%, while the a3 is designed to offer runners not only a smooth ride but also an extra push.

Bernd Janssen, an analyst at UBS Warburg, says he is impressed that order backlogs for Adidas shoes have improved dramatically. “I think the company will be out of the woods thanks to its new products,” Janssen says. “They have done a fantastic job of building relations with U.S. retailers.” Hainer is predicting Climacool sales at 500,000 the first year, with 1 million in 2003. With that kind of growth for top-of-the-market, $125 shoes, Hainer may finally become a happy man. With happy feet.

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