Adidas Challenges Nike

Business is like war, and in the realm of sports brands, the rivalry between Adidas and Nike is particularly intense. Now, Adidas has charged straight into Nike’s territory—let’s see how Nike responds.

Leaving Under Armour behind and closing in on Nike, Adidas showed strong momentum in Q3.

A fierce offensive on Nike’s North American stronghold

Adidas has just released a strong Q3 financial report, with standout performance in the North American market. The report shows that, excluding currency effects, Adidas’ global revenue grew 12% in Q3 this year. Adidas brand revenue increased 13%, driven mainly by double-digit sales growth in running, outdoor, Originals, and neo lines, while Reebok brand revenue rose 1%.

In terms of channels, all distribution channels achieved growth in Q3, with e-commerce performing especially strongly, surging 39%. In euro terms, Adidas’ global sales grew 9% to €5.677 billion in Q3.

Adidas Global CEO Kasper Rorsted stated that in Q3, the company’s strategic growth areas—North America, Greater China, and e-commerce—once again served as key drivers of robust revenue growth. Rorsted said, “Our strong growth momentum was primarily reflected in significantly improved profitability in Q3. We’ve delivered another solid financial report and are steadily advancing toward our ambitious 2017 financial goals.”

The report shows Adidas’ gross margin rose 2.4 percentage points YoY to 50.4% in Q3. Adidas’ gross margin has now surpassed Nike’s. Nike’s most recent quarterly gross margin was 43.7%, down 1.8% YoY.

This rise and fall reflect the current momentum of both brands, and nowhere is this more evident than in the North American market. The report shows Adidas achieved double-digit strong growth in North America in Q3, with revenue up 23% YoY. The Adidas brand’s growth in the North American market hit as high as 31%. In contrast, Nike’s latest quarterly report showed growth challenges in North America, with revenue down 3% YoY.

“To become the world’s No. 1, you must first secure the top spot in North America,” said Adidas North America President Mark King in an April media interview. “Sports culture—trends, media, hype—is centered in the United States.”

?North America is Nike’s stronghold, and one Adidas has long coveted. But King admits that the North American market has always been a tough nut for Adidas to crack.

However, that began to change about two years ago. This is partly due to slower growth in North America for key rival Nike, but also naturally thanks to Adidas’ aggressive push. Two years ago, Adidas held around a 5% market share in North America; today, it has risen to 11%.

Data from NPD Group shows that in August this year, Adidas surpassed Nike’s Jordan brand to become the No. 2 sportswear footwear brand in the U.S. That month, Adidas basketball shoe sales grew 40%, while Nike’s comparable products dropped 20%. In the first eight months of this year, Adidas nearly doubled its U.S. market share to about 11.3%.

Although Nike remained the U.S. market leader in the first eight months of this year, holding a 45.5% share—with Nike and Jordan brands accounting for 37% and 9.5% respectively—growth momentum has weakened compared to the same period last year, when their shares were 39% and 9.4%.

In the seesaw battle between Adidas and Nike, 2015 was a pivotal year. At the time, Adidas was struggling through a transformation. From 2011 to 2014, Adidas lost ground in the U.S. market, even issuing a profit warning in 2014 and losing its No. 2 spot to Under Armour. In FY2014, U.S. business declines dragged Adidas’ North American revenue down 6%, making it the only region where Adidas saw revenue contraction that year.

By restructuring its North American business, Adidas managed to halt the decline in 2015, showing clear signs of recovery with 5% YoY revenue growth—but still lagged far behind Nike, with growth at just half Nike’s rate. At the time, nine of the top 10 best-selling sneakers in the U.S. were Nike’s, with the other belonging to Under Armour.

Back then, Nike was riding high, unmatched as the undisputed king in both revenue growth and stock performance. In FY2015, Nike set multiple financial records, with revenue hitting $30.6 billion, up 10% YoY. From FY2010 to FY2015, Nike dominated its home turf, the North American market, with an average annual revenue growth rate of 10%.

At the 2015 Investor Day, Nike CEO Mark Parker boldly declared a goal of reaching $50 billion in revenue by 2020.

Yet in just over two years, the competitive dynamics between Adidas and Nike in this crucial battleground have shifted dramatically. In their latest quarterly reports, Adidas posted double-digit revenue growth, while Nike saw a rare decline. So, how did Adidas do it?

The answer is simple. In the words of Adidas CEO Kasper Rorsted, it’s “providing the right products to the right consumers at the right time”; in the words of Adidas North America President Mark King, it’s “focusing on what consumers want and think.”

This is particularly evident in Adidas’ grasp of the casual fashion sportswear trend. Adidas was the first to spot this shift and moved early to seize the advantage.

Behind this success lies the contribution of Adidas’ “Creating the New” strategy. Launched in 2015, this global strategic framework focused on significantly boosting brand appeal, driving strong sales growth, and strengthening profitability.

Guided by the “Creating the New” strategy, Adidas launched a powerful offensive in the U.S. market.“As of Q3 this year, we’ve achieved quarterly growth rates of over 30% in the U.S. market every quarter, and we expect strong growth in Q4 as well. Clearly, our market share in the U.S. will continue to rise,”said Rorsted.

It seems Adidas is not content with its current “No. 2” position. Speaking about the U.S. market, Rorsted stated that they are still far from their desired position there and have a long way to go, so they will continue to invest heavily in the U.S.

When analyzing the reasons behind the shifting momentum between Nike and Adidas in the North American market, Wedbush Securities analyst Christopher Svezia noted that Adidas has done better in innovation and marketing, invested heavily in North America, while Nike has fallen short on innovation and set product prices too high.

Strong Performance in Greater China

Besides its aggressive push against Nike in the North American market, Adidas has also delivered impressive results in another key market—Greater China.

Excluding exchange rate factors, Adidas Greater China achieved a 28% sales increase in Q3 2017, driven by the continued strong momentum of both the Adidas brand and the Reebok brand.

Glent Klarck, Managing Director of Adidas Greater China, stated that Adidas Greater China recorded strong double-digit sales growth in Q3 2017, once again demonstrating the Adidas brand's increasing appeal to Chinese consumers. We are steadily advancing under the guidance of our 2020 “Creating the New” strategy in Greater China.

“For the remainder of 2017, we will continue to focus on ‘Sport Inspired Creativity,’ further intensifying our efforts in key areas to let consumers truly experience the Adidas brand philosophy, provide them with an outstanding shopping experience, and continue expanding in both emerging and key cities while implementing our digital strategy,” said Klarck.

This year marks the second year of Adidas’ “Creating the New” strategy, which aims to make Adidas the leading sports brand in Greater China by 2020. Under this strategy, Adidas focuses on five key categories: football, running, women, kids, and Originals. To achieve this, Adidas has laid out three strategic pillars: core cities, speed, and resource openness.

Strong results prove that this strategy is effective in Greater China. Excluding exchange rate effects, Adidas Greater China saw a 29% sales increase in the first three quarters of this year. The Adidas brand revenue grew 29%, mainly driven by double-digit growth in running, training, outdoor, basketball, Originals, and neo series. The Reebok brand revenue increased by 16%, benefiting primarily from double-digit growth in training and running series.

In the first three quarters of this year, Adidas' gross margin in Greater China improved by 0.1 percentage points year-on-year to 58.1%, reflecting improvements in pricing, product mix, and omnichannel performance, as well as reduced input costs.

Whether in terms of revenue or gross margin, Adidas’ performance in Greater China is commendable. As a key market for Adidas, Greater China—especially mainland China—holds a pivotal position in Adidas’ global footprint.

When explaining why the Adidas brand is so popular in the Chinese market, Rorsted summarized it as more stores, more franchised distribution rights, and e-commerce.

Given the strong performance in North America and Greater China, Adidas expects global revenue growth, excluding exchange rate factors, to reach 17%-19% this year, with both North America and Greater China achieving double-digit growth. If all goes as expected, Adidas is likely to further narrow the revenue gap with Nike, and the global battle among sportswear brands will see further shifts.

Source: Internet + Sports