Adidas boosts its North American market share

[LOS ANGELES] For February's NBA All-Star Weekend in Los Angeles, Adidas rented space at 747 Warehouse St. Over the course of two days, tens of thousands of people wandered through the venue - which had a full-sized basketball court, a pop-up design studio, food stations and a "sneaker pickup" point. Sponsored stars also stopped by, including the Houston Rockets' James Harden and Kanye West, who gave an impromptu concert.

"Fifteen or 20 hip-hop bands and athletes and basketball. . . . It was a celebration," said Mark King, president of Adidas North America. The company also released a dozen new shoe models - from all-white high-tops to orange runners.

Adidas has cause to celebrate. Since Mr King took over in 2014, the company has more than doubled its North American market share, and its stock has nearly quadrupled globally. Even a pay-to-play college basketball scandal, which could send one of the company's former executives to prison, has done little to slow Adidas' momentum.

On March 14, Adidas released its 2017 annual report showing that North American revenue grew 27 per cent. That's compared with 3 per cent growth for Nike in 2017 and Adidas' 2013 increase of just 2 per cent. Industry experts said the company's sudden growth spurt is a story of technology, celebrity and a healthy dose of luck.

Starting in the 1920s, brothers Adolf and Rudolf Dassler made shoes together in the small German town of Herzogenaurach. In 1948, they had a falling out - with Rudolf starting what would become Puma and Adolf founding Adidas.

In 1954, the German national team won the World Cup wearing Adidas cleats - complete with screw-in studs and a lightweight build - and the brand took off. The European company also saw some success in the American market. By 1984, Adidas was the front-runner to sign a highly touted NBA draft pick named Michael Jordan.

Instead, Nike swooped in and made a now-famous deal that propelled it to the top of what has since been dubbed the "sneaker wars." Adidas has been stuck in second (or worse) for decades.

Part of Adidas' problem, industry analysts said, is that it was designing for a European audience, not an American one. "Sometimes the shoes that worked in Europe worked here," said Matt Powell of NPD Group, a market research company. "And sometimes they didn't." By the 2010s, as its market share dwindled and stock prices stalled, Adidas decided it was time for a change. Beginning in 2014, the company looked west.

Aside from bringing in Mr King as the North American president, its gamble involved moving some 200 top employees from Germany to the United States - including lead designer Paul Gaudio - and investing millions in the American market. The company also launched a shoe design hub in Brooklyn and a robotic "speedfactory" in Atlanta and has plans to expand its North American headquarters in Portland, Ore.

"They're still in growth mode," said Yu-Ming Wu, publisher of Sneaker News, a website that covers the shoe industry. "Last I heard, they had employees sitting in hallways." The expansion has taken many by surprise. When Adidas overtook Jordan Brand, a subsidiary of Nike, for second in sports footwear sales in the fall, Mr Powell tweeted, "This is an achievement I never thought I would see in my lifetime." Even Mr King said the magnitude was a bit unexpected. "I'm a dreamer. I had high hopes," he said. "(But) I didn't know all this was going to happen." That growth can be linked in part to Adidas' introduction of its Boost midsole technology in 2013. Designed in conjunction with German chemical company BASF, Boost is squishy foam cushioning that is layered into the shoe to increase comfort and energy transfer. Boost has since been integrated across Adidas' products, from lifestyle to running shoes. John Horan, founder of Sporting Goods Intelligence, an industry analysis firm, calls the technology "comfortable as hell." But at first, sales were sluggish.

"Boost checks the boxes from an innovation standpoint," Mr Gaudio said. "You just need to let (consumers) know it's out there and why they should care." To do that, Adidas took out its checkbook and went looking for talent.

Since 2014, Adidas has quadrupled its presence among Major League Baseball players (signing Xander Bogaerts of the Boston Red Sox, among others) and doubled its NFL roster (King said two-time league MVP Aaron Rodgers of the Green Bay Packers, a longtime friend, actually asked to join Adidas). On the basketball court, Adidas' US$185 million deal with then-Chicago Bulls star Derrick Rose was diminished by the point guard's injury woes, but that didn't stop the company from luring Harden away from Nike in 2015 for US$200 million. This season, Harden is the front-runner for NBA MVP.

"It's always great when you have a brand that wants you and will do whatever it takes to get you and market you the right way," Harden told ESPN, just after making the switch. "I have a voice that can and will be heard." Adidas has been making even bigger bets on the entertainment side - a realm in which it typically has been stronger. The company has added Pharrell Williams, Kendall Jenner and West, whose 2016 deal could end up being worth more than US$1 billion. "I think it was one of the wisest investments in the sneaker world," Mr Wu said of a West-Adidas relationship that already is paying off. "You can think of Kanye as being somewhat of a Michael Jordan for Adidas." West's first Jordan-like moment came in 2015. On May 9, he took the stage at the Wango Tango concert wearing all-white Energy Boost sneakers. Before the performance, the shoes weren't doing particularly well. After the performance - as photos of West in the kicks circulated on the Internet - the product sold out. About a week later, he did the same thing with the Ultra Boost shoe.

While Adidas' Kanye era has brought the company once-unimaginable success, it also highlights the industry's fickleness. "Absolutely, they had a business plan and marketing strategy. (But it) was a lot of luck as well," Wu said. Referring to the success of West's concerts, he added, "You can't have a marketing plan for that." Horan posited that Adidas was the beneficiary of another stroke of fortune.

Thanks to the NBA All-Star Game, February is huge in the footwear industry. It is the month when companies release their biggest products. It's also when income tax returns start coming in, fueling shoe purchases.

But in late 2015, the government enacted the Protecting Americans from Tax Hikes Act. While the law was aimed at combating tax fraud, it also delayed tax returns from 2016 for many low-income families. That meant less money for February shoe releases, which caused sales at places such as Foot Locker to tumble.

"The late refunds crushed the whole industry," Mr Powell said. "There was no brand that benefited from that." Mr Horan, however, said he believes Adidas emerged from the carnage in a better position than its competitors. "When the tax checks didn't show up, people in that market started saying: 'I don't need Nike. Maybe I could go with the Kanye West (shoe),' " Mr Horan said. "The whole narrative was changed at that point." But there have been challenges, as well.

In the fall, Jim Gatto, Adidas' director of global sports marketing, and two associates were arrested for allegedly funneling hundreds of thousands of dollars to high school basketball recruits to get them to sign with preferred universities. The case, which is based on federal wire-fraud charges and still is winding its way through the courts, could land Mr Gatto in prison.

The scandal may curtail the enormous influence sneaker companies have on college basketball. In the short term, though, there are few signs that it is weighing on Adidas' bottom line. "The early results don't indicate that there's been a negative impact," Powell said.

Mr Wu added, "I honestly don't think, unless it's a much more severe controversy, that it'll affect them that much." Adidas officials are staying relatively quiet on the topic. "We regret that it happened," said Mr King, noting that the company has made a few internal adjustments but can't comment much on the incident. "We're moving forward." Beyond the NCAA scandal, experts said they will be watching whether Adidas can keep up. "Athletic footwear industry is pretty cyclical," said Andy Annunziata, a researcher with SportsOneSource. "Trends change in a moment's notice." Mr Wu said Nike has been on the upswing recently and has "more money than God" at its disposal. That has allowed it to sign LeBron James to a lifetime deal potentially worth more than $1 billion. About Adidas, Mr Wu said its UltraBoost shoe "is sort of played out" but that the company has amassed a lot of talent, including a few designers who moved over from Nike.

Following up on Boost, Adidas recently released similar bounce technology. And it says it has more significant technology changes in the works. "We're not here to finish second," said Adidas' head of U.S. team sports, Jeff McGillis. He specifically avoided saying Nike but emphasized that "none of us play to lose." While Adidas' U.S. market share has climbed to around 11 per cent, it's still far behind Nike's roughly 37 per cent share. And even Mr King admitted that current growth levels are bound to slow somewhat. But the sneaker wars aren't over - and may just be heating up.

"We're going to have let it play out and see what happens," Mr Wu said. "We're going to see a good fight."

WP