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Adidas Expects Big Jump in Sourcing Costs, Plans to Cut China Sourcing

Rising labor costs and higher input prices are weighing heavily on German athletic wear brand Adidas, and the retailer said it expects “a significant increase” in its sourcing costs by 2020.

To combat the heightened costs, Adidas said Tuesday it will increase prices and decrease its sourcing out of China.

Double-digit increases in labor costs and higher costs for product inputs like cotton, nylon and EVA, are putting pressure on the company’s future prices, and that coupled with currency effects will cut gross margin by 50-100 basis points in 2016.

“As a globally operating company, the Adidas Group is exposed to exchange rate fluctuations,” a statement noted. “This is a direct result of the Group’s Asian-dominated sourcing activities, which are largely denominated in U.S. dollars, while sales are denominated in other currencies to a larger extent.”

The company tried to hedge against the stronger dollar but couldn’t completely offset the impact on gross margin.

In order to counterbalance the headwinds, Adidas said it will continue improving production efficiencies, focusing on product and materials, supply base and allocation, level loading and productivity improvements. But to further offset negative currency effects, the company said several regions will see “significant price increases,” and that it will adjust trade terms with its retail partners and focus on a more favorable category, product and channel mix.

Adidas’ sourcing focus will shift, too.

The company’s head of global sourcing, John McNamara, said at an investor event in Adidas’ Herzogenaurach, Germany home base, that he expects labor costs to continue rising at a rate of 11-15 percent a year and that raw materials would rise 1-4 percent each year.

As a result, McNamara said Adidas would cut the amount of clothing and shoes it sources from China, Reuters reported, and that orders to Indonesia, Vietnam, Cambodia and Myanmar would see an uptick.

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By 2020, he said Myanmar would account for 4 percent of the company’s shoe production.

“We see Myanmar as one of the last great sourcing markets for our type of product,” Reuters reported McNamara as saying.

Adidas said it plans to focus on becoming more consumer-centric, improving its decision-making processes and optimizing the overall organizational set up to drive efficiency.

And despite the projected rising costs, the company won’t be pulling back on its marketing spend. For this year and next, Adidas increased its marketing target range by one percentage point to between 13 and 14 percent of sales.

“We are well-prepared to cope with the cost pressure that the entire industry will be facing next year,” Adidas Group CFO Robin Stalker said. “On the one hand, our brands and products are enjoying strong momentum. On the other hand, we are optimizing our processes throughout the group and along the entire supply chain to drive further efficiency gains and we are continuing our structured hedging approach. We therefore have all the levers in our hand that will enable us to stay on our growth path in 2016 – and beyond.”