Adidas: A $1 Billion Bet On Digital
Looking to follow in their rival Nike's footsteps, Adidas has promised to invest more than $1 billion in their eCommerce strategy — but is it too late?
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German sportswear company Adidas reported earnings yesterday, beating estimates and unveiling their five-year eCommerce strategy for the first time publicly.
Here are the highlights:
Revenue grew 1% YoY on a currency-neutral basis
About 50% of Adidas stores in Europe were still closed last quarter
Operating profit fell to ~$270 million, beating the consensus of $235 million
Online sales grew 43% from the same period last year
Even more interesting?
Adidas announced a plan to invest more than $1 billion in their eCommerce effort, looking to follow in their rival Nike's footsteps, which has executed their online sales strategy to perfection.
With their stock closing up 4% on the day, investors seem satisfied.
While their top-line results were certainly encouraging, investors appeared to push the stock higher based on the lofty growth targets that Adidas announced. For example, the German sportswear company unveiled targets to double eCommerce sales to $9.5 billion to $11 billion by 2025. That’s certainly ambitious.
The focus on eCommerce has obviously been accelerated by the COVID-19 pandemic (and the general shift of commerce worldwide). Still, part of me thinks they’ve seen the strategy that Nike has rolled out and want to participate.
In an effort to become a “digital-first organization,” Nike has spent the last few years strategically shifting its retail strategy. Nike cut ties with thousands of retailers across the country last year, accepting no new orders and canceling any outstanding orders — even stores that carried the brand for more than 40-years.
Rather than selling inventory through department stores & wholesale outlets, Nike has built smaller stores called "Nike Live," which serve as pickup hubs for online orders, and multi-level flagship stores called "House of Innovation.”
Nike CEO John Donahoe says:
“We are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected and modern shopping experience.”
Simply put, they want to own end-to-end distribution.
It helps with obvious things like inventory management & improved customer service, but the real benefit comes through digital transformation. Nike stores allow customers to scan barcodes for pricing, check available inventory & complete their transaction — all through the Nike app.
By creating an end-to-end distribution model that reinforces digital interaction, Nike can improve its business's underlying economics. Not only does Nike earn 10% higher margins on digital sales, but a customer who connects with Nike on 2+ platforms has a lifetime value that’s 4x higher than those who don’t.
Nike reported an 84% increase in digital sales last quarter, representing over 25% of their sales in North America, a goal they didn’t expect to hit until 2023. In the coming years, they expect digital sales to represent 50% of their overall business — a remarkable achievement.
Now, it’s Adidas’ turn.
Their five-year plan comes after a tough year, in which store closures due to COVID-19 impacted their revenue greatly, slumping 14% on a year-over-year basis to ~$21 billion. Now, with more than 95% of Adidas stores reopening globally, the company expects a “strong top-line recovery” in 2021.
But retail isn’t the long-term winning strategy.
By investing in eCommerce data analytics, inventory management, and a streamlined sales strategy, Adidas will see its margins improve, customer acquisition costs drop, and the lifetime value of a customer rise — similar to how Nike has benefited.
For as bad as the COVID-19 pandemic has been — for many reasons — the timing coinciding with Nike’s digital transformation strategy has been rocket fuel for their business. Adidas didn’t benefit as much, but investing in an online strategy now is better than doing it later.
Ultimately, the market has decided. The consumer shift toward online sales is here to stay. Large retailers like Adidas can either use their size and scale as rocket fuel or stick to their retail-based strategy, becoming archaic and obsolete in the process.
With a billion-dollar-plus investment, Adidas has made its intention clear.
Now, it’s all about execution. On that front, only time will tell.
Have a great day, and we’ll talk tomorrow.
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