Wednesday November 10, 2021
Problems cost billions
Location Asia is causing problems for Adidas
Adidas now generates the majority of its sales in China. But it is precisely there that sales collapse noticeably. In addition, there are other problems with Asia as a location, so that the Dax group is coming under noticeable pressure. An “Action Plan” should now bring new momentum.
The ongoing delivery problems caused by plant closings in Vietnam and lower demand in the important Chinese market spoiled the third quarter for the world’s second largest sporting goods manufacturer, Adidas. Although the group confirmed its forecast for the year, it now expects to land at the lower end of the range.
The stock of the DAX company then came under pressure. Adidas had recently announced a profit from continuing operations of 1.4 to 1.5 billion euros. Sales should continue to grow by up to 20 percent after adjusting for currency effects. In the first nine months, 1.37 billion euros were raised, with sales growth of 24 percent after adjusting for currency effects. Traditionally, however, the fourth quarter is one of the weakest earnings for the Herzogenaurach-based company.
Sales growth weakened in the third quarter. The persistently problematic environment in China with a drop in sales of 15 percent, corona-related lockdowns in the Asia-Pacific region and supply chain problems would have dampened sales growth by 600 million euros. According to the information, sales rose by three percent after adjusting for currency effects to EUR 5.75 billion. The growth drivers were Europe and North America, which increased by around nine percent after adjusting for currency effects.
Works in Vietnam now closed
For months, the plants in Vietnam, the country with the largest shoe production in the world, were completely closed due to the pandemic. In the meantime, operations have resumed, and Adidas expects full production capacities again by the end of the year. “2021 turned out to be a significantly different year than we had all believed in January,” said Adidas CEO Kasper Rorsted.
But there is no alternative to the production location in Asia. In China, where Adidas normally not only makes a large part of its sales, but also generates the highest profit margins, it was not only the corona pandemic but also political problems that hampered business. Due to political tensions, the political leadership in Beijing had called for a boycott of Western companies in phases – Adidas had also felt that, it said. Overall, the Herzogenaurach-based company has to cope with sales losses of more than two billion euros.
“Action Plan” for China
Adidas now wants to stop the significant decline in sales with an “Action Plan” in China. Among other things, this plans to strengthen the Adidas brand and the digital presence in China, ramp up local production for the Chinese market and optimize the store network and stocks, said Rorsted and CFO Harm Ohlmeyer in the media conference call.
Around a third of the new products for the Chinese market will from now on be created and produced in the country. The group wants to invest in IT infrastructure and IT talent. Surplus products are to be taken from the market, this has already happened with more than 10 million pieces. In terms of the charging infrastructure, more than 100 new Terrex, Y-3 and Stella concept sales points are to be created in important cities such as Shanghai. A global and local task force is involved in the “Action Plan”. “There is still a long way to go in China,” said Rorsted. “China will remain an important growth market for us in the long term.”
The sale of the second brand Reebok to the American Authentic Brand Group (ABG) should take place in the first quarter of next year. Adidas had agreed with the buyer in August on a price of 2.1 billion euros for the traditional brand. In 2006, Adidas had to pay a billion more, but in between already sold parts for 0.4 billion euros. CFO Harm Ohlmeyer did not want to say on Wednesday how high the total loss of the takeover including investments was over the years. Reebok has also done a lot for the Adidas brand, he said.