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Adidas CEO Says “Creating the New” Initiative Making Strides

Adidas remains focused on its “Creating the New” initiative and reaching its five-year goals by 2020 driven by three strategic choices: Speed, Cities and Open Source, its CEO told shareholders this week in Germany.

“In 2017, we made considerable progress in all three areas,” CEO Kasper Rorsted said. “Speed is a key factor for success in our business. We want to be in a position to always offer our consumers exactly the products they want to buy–whenever, wherever and however they want to buy. That means we need speed.”

Rorsted said net sales share of speed-enabled products increased to 28 percent in 2017 and Adidas is embedding speed in its global supply chain and accelerating the traditional production process.

“At the same time, we are exploring new, intelligent business models and technologies,” he said. “Our Speedfactories, with their data-driven development process and automated production, are important future-oriented projects. Through our two Speedfactories, in Ansbach and Atlanta, we are bringing production closer to the consumer. Last year we implemented our first major Speedfactory project: the ‘Adidas Made For’ series of individually crafted shoes. Each pair of shoes is customized to a global key city.”

The CEO said the reason for focusing on key strategic cities is because trends primarily are born in metropolitan centers. That’s why Adidas is investing its brand presence and marketing efforts in six cities–London, Los Angeles, New York, Paris, Shanghai and Tokyo.

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He said these cities offer a dynamic platform for activating the company’s brands, citing successful activities in 2017 such as the “Green Light Run” in Tokyo, the Parley “Run for the Oceans” in New York and the “Tango League” soccer tournaments.

“We also choose these cities for the launch of global campaigns and new products,” Rorsted said. “One example of this is the presentation of our Nemeziz soccer boot in London. We closely connect with our trade partners and own retail stores for these campaign and product launches. In 2017, we were able to increase market share in our key cities. Our goal is to double revenues there by the end of 2020 compared to 2015.”

As for the Open Source strategy, Rorsted said it means “collaboration with athletes, consumers and partners from the worlds of industry, sport and entertainment.”

An example is the company’s collaboration with Carbon, a California-based pioneer in 4D printing, to create Futurecraft 4D, presented as the world’s first sports shoe featuring a midsole crafted with light and oxygen, made possible by the Digital Light Synthesis production process developed by Carbon.

The CEO noted that close collaboration with many top athletes also provides impetus for brand growth. This includes Lionel Messi and James Harden, and teams like Bayern München or Real Madrid, with which Adidas has developed bespoke collections.

Growth Projects

In addition to the Creating the New initiative, Adidas launched several projects aimed at accelerating development. These involves Portfolio, Adidas North America, One Adidas and Digital, Rorsted noted.

In Portfolio, Rorsted said this involves a refocus on marketing sports footwear and apparel by streamlining the brand portfolio. In 2017, Adidas divested its golf brands TaylorMade, Adams Golf and Ashworth, and CCM Hockey business.

At the same time, its “Muscle-Up” turnaround plan at Reebok, aimed at helping the brand gain new strength, is going well, he said. The goal is to significantly increase Reebok’s profitability by 2020, which is being achieved through developments such as setting up a new, modern headquarters for Reebok in downtown Boston, closing stores that were detrimental to brand value or not profitable enough, and launching a digital initiative.

“We have not reached our goal with Reebok yet,” he said. “But we are confident that the measures taken in the past few months are a good foundation for our future success.”

Turning to the Adidas brand in North America, Rorsted noted that North America is the biggest market in the sporting goods industry, with about 40 percent of sales in the sector generated in the U.S.

”At the same time, North America is the market in which Adidas has a relatively small market share compared to other key regions around the world.” Rorsted said. “North America, therefore, offers us great growth potential. For this reason, last year, we defined North America as one of our strategic priorities and significantly increased our investments in the region. Meanwhile, we know the market well, and we have considerably expanded our infrastructure. Therefore, we believe that North America, together with Greater China, will contribute over-proportionately to our growth in the coming years, and we will continue to support this with corresponding investments.”

The third initiative aimed at accelerating growth is One Adidas, which encompasses numerous projects that all have the objective of positioning the company as a strong global player. To that end, the company is standardizing systems and processes, reducing the number of styles and aligning marketing activities worldwide.

“We are establishing global business solutions in order to become faster and make better decisions,” he said. “In purchasing, we want to utilize the economies of scale of a global company to a greater extent than we have done so far. All in all, through One Adidas, we are considerably simplifying our business, increasing our operational efficiency and improving our profitability.”

Manufacturing Shifts

Rorsted added that digital plays a key role in the overall strategy.

“Digital is changing the way we manufacture, market and sell products,” he said. “Digital is having a fundamental impact on the way we work. For this reason, we are driving the digital transformation throughout the entire organization. We are investing into our digital infrastructure, digital campaigns and, last but not least, into digital expertise and talent.”

In the area of manufacturing, Reuters reported that Rorsted added at the annual meeting that Adidas expects its shift of footwear sourcing to Vietnam from China to continue, although not necessarily driven by concern over potential U.S. tariffs on Chinese-made shoes.

Factories in Vietnam made 44 percent of Adidas footwear in 2017, up from 31 percent  in 2012, while Chinese suppliers made 19 percent, down from more than 30 percent in 2012, Reuters reported Rorsted as telling shareholders. Nike and Puma also have been shifting footwear production to Vietnam from China.

While China remains the dominant supplier, with a 71 percent share of U.S. footwear imports, the Footwear Distributors and Retailers of America said imports from China reached a 20-year low in 2017. Footwear imports from China totaled $14 billion in 2017, a 4.3% dip from its position in 2016. Vietnam, the second largest supplier, sent $5.4 billion worth of shoes to the U.S., an 11 percent gain over its position the prior year.

In digital, Rorsted said a key goal is to grow sales from e-commerce activities to 4 billion euros ($4.7 billion) by 2020.

“That is the reason why in 2017, among other things, we introduced new functionalities and technologies with which we are further improving online shopping,” he said. “Last year, we brought our Adidas shopping app to market in North America and the U.K. It has also been available in Germany since March. The app has already been downloaded more than 1.7 million times. With growth of 57 percent, our e-commerce platform was by far the fastest-growing distribution channel in 2017.’

In the area sustainability, the CEO said the company is increasingly using Parley Ocean Plastic in the manufacture of products, including in the running, training and football categories. He said last year, Adidas created more than 1 million pairs of shoes made with Parley Ocean Plastic. The waste used was the equivalent of around 11 million plastic bottles.

“Consistent implementation of our strategy is reflected in strong results for the past financial year,” he added.

In 2017, Adidas posted record sales of 21.2 billion euros ($25.31 billion), a 16 percent increase from the prior year. Net income from continuing operations rose 32 percent to 1.4 billion euros ($1.67 billion).