Adidas chief keen to pace himself after swift start
Kasper Rorsted has buoyed sportswear group but online and US challenges lie ahead
Kasper Rorsted has hit the ground running.
Since taking over as chief executive of Adidas last October, the Danish manager has ratcheted up the German sportswear maker’s financial targets, put its ice hockey business up for sale, and finally sold off its underperforming golf business.
In combination with rapid growth — Adidas’s net earnings jumped by almost a third in the first quarter, having risen 59 per cent last year — Mr Rorsted’s first steps have enthused investors: the group’s shares have more than doubled since his appointment was announced last January, and earlier this month hit an all-time high.
But despite his quick start, Mr Rorsted is determined not to get carried away. “We have one good year behind us. But one good year does very little for [our] 2020 [targets],” he says. “You need to do more than have a good start.”
Indeed, for all the investor euphoria, the world’s second biggest sportswear group is a work in progress. Its operating margin last year was barely half that of its bigger rival, Nike — and improving this will be one of the main metrics on which Mr Rorsted is judged.
Analysts say that the key will be turning around Adidas’s business in North America — the world’s biggest sports market and the one where Adidas most lags behind Nike — and adapting to consumers’ increasing penchant for shopping online.
“They clearly have to get the US right: in the rest of their markets they have an average share of around 15 per cent, and in the US they have less than 10, so there is a big opportunity there to make up ground,” says John Guy, an analyst at MainFirst.
“And their online business is where the margins are highest, so if they can really drive this, that will help them with their overall margin targets.”
In the US, Adidas is already making strides. It has regained the number two spot it lost in 2014. But the surge has been driven by two factors that are unlikely to last for ever: a marketing splurge initiated by Mr Rorsted’s predecessor, Herbert Hainer; and the popularity of lifestyle brands such as Adidas’s Stan Smith trainers, whose sales have surged amid a trend for retro styles.
Mr Rorsted acknowledges that following the lifestyle trend has caused trouble for rivals — such as Puma — but says that Adidas is not “betting the farm”, pointing out that athleisure products account for 30 per cent of Adidas’s sales, versus 70 per cent for its sports products. The shift towards more comfortable sporty footwear is also a permanent change, rather than a fad, he argues.
“If you go to a US airport and look at what people are wearing . . . this is a change in how you dress. I believe very strongly that the vast majority of people wearing these shoes actually don’t want to go back,” he says.
“I had a meeting with a prime minister on Sunday night, and I was wearing a suit and black shoes like these,” he adds gesturing to his Adidas trainers. “And it was not like people said you can’t wear that.”
Boosting Adidas’s online sales is the other big challenge. Mr Rorsted’s decision to lift the group’s 2020 sales target from €22bn to near €26bn was based in part on his belief that Adidas can quadruple its online sales to €4bn by 2020, rather than merely doubling them, as Mr Hainer had envisaged.
The group has been building data tools that allow it to decide in real time how to sell its wares and at what price with greater precision. And it is increasingly targeting is advertising towards mobile devices. “It’s about changing how we operate, and making sure that we drive consumers to our website,” says Mr Rorsted.
The other big question is the future of Adidas’s underperforming Reebok fitness brand, which was bought by Mr Hainer in 2005, and which many investors would like Adidas to sell.
“Buying Reebok was a mistake which distracted Adidas for many years,” says Ingo Speich, a portfolio manager at Union Investment, one of Adidas’s top 15 shareholders. “Now it seems to be under control, but there is a lot to be said for Adidas focusing on its core brand instead. If Rorsted can’t fix Reebok soon, then they should get rid of it.”
Mr Rorsted has said that he expects Reebok’s turnround to be complete within three to four years. But he concedes that he could consider offloading it sooner “if we completely miss what we’re trying to do”.
“If we have an asset that consistently misses all its targets, then of course we will draw conclusions with that asset,” he says. “But I want to be specific: that applies to everything. The moment you say in a company that anything is sacred, that is the beginning of the end, because that means that you give someone a free ride.”