It’s 2014 and Adidas is struggling. The once-dominant sportswear company is now lost and directionless suffering through declining revenue and profits three years in a row. Outside of football, consumers don’t care for the brand, retailers are giving their most valuable shelf space to Nike, new products are flopping, and activists are threatening a hostile takeover if the CEO is not replaced within the year.
In this episode, we’ll cover Adidas, the fatal mistakes that its former CEO made which toppled the German brand to a distant third behind Nike and UnderArmour, sparked an investor battle, and ultimately cost him his job. We’ll also cover the winning strategy that revolutionized Adidas and the new CEO’s moves which have since taken the company to new heights. While the average CEO tenure is 5 years, Adidas has only had 2 CEOs in its modern history, Herbert Hainer and Kasper Rorstead.
Our story starts in 2005, the early Herbert Hainer era. Hainer was a company man who rose up the sales ranks at Adidas for 15 years before being appointed CEO in 2001. After 4 quiet years at the helm, Hainer made his first massive move, acquiring Reebok for 3.
8 billion dollars in 2005. Adidas had made its name in Europe as a leading sports performance brand. European football is a true global sport and Adidas was the leader for all things soccer.
For decades, Adidas has been the official partner of FIFA and UEFA. In 2005, Adidas was the sponsor for renowned national football teams like Germany, France, Spain, Argentina, Japan and prestigious clubs like Liverpool, Chelsea, and Real Madrid. The company was also the sponsor for world class players like David Beckham and Lionel Messi.
Everything from the ball to the kits to the boots had been made by Adidas for over 50 years. For players and fans, Adidas and football were synonymous. While soccer is the main sport in Europe, Africa, and Latin America, it’s never enjoyed the same dominant popularity in America and Asia.
As a result, Adidas had strong market share in Europe but small presence in the US and China. Hainer believed that Adidas had reached its limit as a European brand and could not be stretched beyond its football roots. By acquiring Reebok, Hainer believed he had finally found the missing piece for Adidas to become a global company.
Reebok would complement Adidas’s European dominance by bringing in the high-value Chinese and US markets that had eluded the company for decades. Hainer was so bullish on Reebok that he paid a 34% premium, an additional 1. 3 billion dollars on top of its market cap, to acquire the company.
Adidas’s market cap at the time was $7 billion dollars. When companies talk about M&A, they’re usually referring to small additions or equal mergers. For Adidas to buy Reebok for over half of its own market cap at 3.
8 billion dollars, is extraordinary. With so much capital spent in one move, Hainer presented a 5-year multi-brand strategy to investors that same year in 2005. His pitch was that sure, buying Reebok cost a lot, but this bold multi-brand strategy would turn Adidas from a humble German business into a global powerhouse.
Hainer believed the company’s future success to be less about making clothes or shoes and more about managing brands - Adidas and Reebok were two brands in what over time could become a sprawling portfolio. In his mind, each brand had its own market and demographic. Let Adidas swim in its own lane, Reebok to focus on its own stuff, and only then you could have something for everyone.
With this five year multi-brand strategy, Hainer promised investors high single digit growth and double digit operating margins by 2010. He broke down his strategy into three strategic priorities for the company to execute towards. The first priority was to leverage Reebok’s strong presence and existing partnerships in American sports to grow sales in North America.
At the time, Reebok was the exclusive official uniform and apparel supplier for the NFL, NBA, MLB, and NHL. Keeping to his multi-brand strategy, Hainer kept Reebok as the brand for American football, baseball, and hockey. Yet he opted for an aggressive approach with basketball, immediately tearing up Reebok’s existing contract and signing a new exclusive 11-year NBA deal for Adidas for $400 million dollars.
While Hainer left American football, baseball, and hockey to Reebok, he entrusted basketball to Adidas. Basketball was the most popular sport in Asia and star players like Yao Ming had captured the attention of over 80 million Chinese fans in the 2000’s. To Hainer, basketball was critical to winning Asia and Reebok’s former leaders had failed to tap into the sport’s commercial potential.
If Adidas could become the leading basketball brand and leading soccer brand in the world, it would have a moat that Nike could never cross. Hainer trusted Adidas over Reebok to handle basketball and Adidas already had a proven distribution network in China. Through Reebok, Adidas had gained four direct channels into the American and Chinese market.
Hainer’s second priority was to maintain the company’s core strengths. Adidas needed to keep its lead in European football. The 2006 World Cup, which took place in their home court Germany, further reinforced Adidas as the leader in all things soccer.
Adidas had been the dominant brand for the entire tournament - nearly every player was wearing Adidas boots, kicking an Adidas ball, and the runner-up France team and the infamous Zidane headbutt moment were all flashing Adidas kits. While sponsorships and publicity help generate consumer desirability, professional athletes genuinely loved wearing Adidas. The company had to maintain its claim to fame by building the best gear for professional players in every sport.
Those product sales made up 70% of the company’s revenue every year. There wasn’t much more to do but to keep the foot on the gas pedal. Hainer’s third priority in his multi-brand strategy was to win the emerging markets.
Beyond soccer and European football, he believed running to be the next global sport. Hainer wanted Adidas to become the leading running brand for runners of all levels. The key elements had been in-place for a while as the company was already the sponsor for the London, Berlin, and Boston Marathon.
From a sales standpoint, Hainer designated Russian and Italy as two strategic emerging markets to win. He was committed to strengthening Adidas’s Europe market share to keep Nike out. While wholesale made up 85% and retail accounted for 15% of Adidas’s sales in 2006, Hainer wanted retail to be a bigger piece of the pie.
The company was reliant on third-party retailers like Footlocker to move product. Hainer’s belief was that opening more stores and selling directly to customers would generate higher margins and stronger brand desirability with better in-store experiences. Before the Reebok acquisition in 2005, Adidas’s top-line hovered around the 6 billion euro mark for years.
In 2006, the first year of Hainer’s multi-brand strategy, Adidas broke the 10 billion euro mark in overall revenue thanks to Reebok’s contribution. Beyond the expected top-line boost, the company didn’t have much to report and investors didn’t have too many questions. They understood that integrating Reebok into Adidas and aligning internal teams to this new strategy would take time.
The multi-brand strategy started to take shape in its second year but the ride was bumpy. Instead of the high single digit growth that Hainer had promised, the company’s overall net sales only grew 2% in 2007. On a per brand level, Adidas sales were up 7% while Reebok’s sales were down 5%.
Hainer highlighted the positives to investors and that combining both brands had netted an unrivaled network of league partnerships and sponsored athletes around the world. But Hainer could not hide from the elephant in the room. Despite the NFL, MLB, and NHL partnerships, Reebok’s products weren’t selling.
If anything, the brand was getting less desirable. Hainer’s explanation was that Reebok had lacked focus long before the acquisition and cleaning up the brand had taken longer than expected. To capture just how much of a mess Reebok had been in, he showed a diagram detailing the before and after makeover that the brand had been going through for the past 2 years.
Reebok’s appeal and business had been declining for years to the point that retailers were regularly relying on heavy discounts to sell Reebok products. As a result, Reebok cultivated this long-running reputation amongst retailers as an aging brand that sold best when positioned as a value purchase at outlets rather than a full-priced premium buy. Discount shoes and clothes was not Adidas’s forte nor was it what Hainer had in mind when he bought Reebok.
Under Reebok’s prior leadership, the company never prioritized selling branded merchandise to hockey, football, and baseball fans beyond athlete jerseys, leaving billions on the table. But most damning of all was that Reebok had no understanding of who its customer was. Was it a lifestyle brand for outlet moms or NFL fans?
Reebok’s leaders had no answers for themselves or for Adidas. The entire situation is curious - if Hainer knew Reebok was such an unfocused, mismanaged brand who had lost sight of its target customer, why did he buy the business at such a premium? How were these problems not found during due diligence?
But Hainer could never publicly say such things. If he did, he would only be revealing his own competence. The deal was done and there was no going back.
As any self-preserving CEO would, Hainer cast a positive spin. Reebok needed to be reinvented, he told investors. Reebok would tap into Adidas’s proven resources to accelerate its repositioning and rebuild its credibility.
Reebok would get a new logo and return to its roots as an everyday fitness brand. This was a very different Reebok than what Hainer had presented in his grand five year multi-brand strategy a year ago. But if anyone could turn around Reebok, Hainer stressed, it would be Adidas.
Impossible is nothing. In 2008, the following year, it appeared Adidas had lived up to its iconic slogan. Overall net sales grew 5%, closer to the high single digit growth that Hainer had promised.
Operating margin improved to 10% and net income increased by 16%. This success was primarily driven by the successful Beijing Olympics and EURO 2008 for which Adidas was the main sponsor. Backed by solid results, Hainer’s message to shareholders was simple.
Stick to the game plan. Then in 2009, the recession hit, tanking the global economy and blowing up Adidas’s momentum. Sales dropped 4% and operating margin plummeted to 5% as the company found itself saddled with too much inventory.
To generate cash flow, Adidas aggressively chewed into its profits, issuing generous discounts and subsidies to retailers to clear stock. To make matters worse, Hainer’s five year bet to win the Russian market backfired. The Russian ruble depreciated significantly relative to other currencies during the recession, reducing Adidas’s profits by over 200 million euros.
Despite the economic conditions, there were some wins for Hainer’s multi-brand strategy that year. When Ballon D’or winner and Barcelona legend Messi scored in the Champions League final, he took off his Adidas F50 boot and kissed it in front of millions of fans. When MVP receiver Santonio Holmes caught the game-winning touchdown in Super Bowl 43, he wore Reebok Griptonite gloves.
When Korean golfer Yong-eun Yang upset Tiger Woods in the PGA championship, he used Adidas TaylorMade irons. But beyond these moments, Reebok’s struggles continued. Hainer revealed to investors the true scope of what they had accomplished to reinvent Reebok over the years.
In 2007, they had fired the entire leadership team, overhauled the brand’s supply chain, and stopped supplying products to retailers. In 2008, they had updated Reebok’s logos, slogans, marketing, and messaging to be a fitness brand that quote on quote fits everyone. Now in 2009, Reebok was finally launching products that reinforced their new positioning like SmoothFit SelectRide, a running shoe that turned into a training shoe with the push of a button, ZigZech shoes with zig zag soles that propelled the wearer further, and EasyTone to help women tone their legs and butt.
Hainer had more to show investors than products and timelines. He was so committed to Reebok’s success that he put the company through a massive reorg to consolidate both brands under one single operating model. The idea here was to maximize synergies and efficiency, so Reebok would sell and distribute into Adidas’s international channels and Adidas would do the same with Reebok’s US channels.
Under this single model, everything would be shared. To facilitate this, Hainer created a new company structure - a global Sales organization dedicated to selling and a Global Brands organization dedicated to marketing. All departments across Reebok and Adidas would roll up into 1 of these 2 organizations.
This reorg was one of the more controversial moves of the Hainer era. Historically, Reebok and Adidas had been operated independently and for good reason. While a single operating model enables efficiency, eliminates miscommunications, and reduces duplication - it also reduces autonomy and speed as employees now have to consider both brands in their work.
The other issue is the apples to apples oversimplification as this model assumes what works for one brand will work for the other. Beyond Reebok and the reorg, Hainer made what may have been biggest mistake as CEO in 2009 when he opted to double down on retail. Contrary to Nike, Hainer believed future profits to be in retail, not e-commerce.
There were 2,200 Adidas and Reebok stores around the world then and Hainer wanted more, better, and faster. His vision was for Adidas to become a leader in retail where anyone could walk into an Adidas or Reebok store, request any product, and get it delivered for the store within a few days if it wasn’t in stock. In order to achieve this speed at scale, operation teams were now told to streamline and harmonize retail ops and supply chains.
Hainer also created a new department dedicated exclusively to retail. Hainer pitched that the consolidated single operating model combined with strong retail presence would be the missing ingredient to achieving the net income and operating margin he promised 4 years ago. Hainer could not have picked a worse time to double down on retail.
2009 was the inflection point of when e-commerce surpassed department store sales. Hainer’s decision to go even more all-in on retail that year would not only cost Adidas hundreds of millions of euros, but also leave e-commerce open for Nike to take over - a decision that Adidas would regret to this day to the tune of billions of euros every year. In a normal year, there likely would have been more scrutiny of Hainer’s performance in 2009.
But ultimately, investors were too preoccupied with the global recession to make a fuss about Adidas. The next year, in 2010, Adidas’s revenue surged 15% thanks to the World Cup. But the company failed to achieve the top line or bottom line that Hainer had promised 5 years a go.
Operating margin and net income sat at 7%, below the double digits that were committed shareholders. Between 2005 and 2010, revenue grew on average at 4. 7%, well below the double digits that were promised.
On a per brand basis, Reebok’s annual sales had plummeted 22% from 2. 4 billion euros in 2006 to 1. 9 billion euros in 2010.
In the same timeframe, Adidas sales had grown 32% from 6. 6 billion to 9 billion euros. Most worrying of all was that North American sales across both brands had dropped 15% from 3 billion euros to 2.
7 billion euros. Adidas was going backward in its most crucial market. To his credit, Hainer nailed basketball and the international markets parts of his strategy.
Asia sales grew 42% from 2006 to 2010 from 2 to 3 billion euros. Sales in Europe grew 20% while Latin America skyrocketed 165% in those 4 years. Shareholders were disappointed with the objective failure of Hainer’s five year strategy but not actively calling for his head.
Perhaps it was this international success or the recession serving as a timely distribution, but Hainer continued on. He rolled out a new long-term strategy that he called “Route 2015”, a five year roadmap with the goals of reaching 17 billion euros in annual sales and 11% operating margin by 2015. In his Route 2015 presentation, Hainer proclaimed that Reebok’s reinvention was finally complete.
Adidas would dedicate itself in the next five years to pushing Reebok to market and establishing its new position as a fitness brand. Hainer stuck to his multi-brand portfolio approach, but this time, on a spectrum. He separated the Adidas brand into two - on one end, he had Adidas Sports as the performance brand for competitive athletes.
On the other end, he had Adidas Originals as a lifestyle fashion brand for everyday consumers. Hainer placed Reebok in the center of the spectrum as the casual, fitness medium between both extremes. Under Route 2015, Adidas would specifically attack three markets - North America, China, and Russia.
Hainer designated these 3 markets as must-win battlegrounds for Adidas in the next 5 years. Winning these 3 markets, he believed, would unlock 50% growth. For North America, Hainer felt that besides basketball, there wasn’t much value in professional American sports.
Reebok’s uniform deals with the NFL, MLB, and NHL didn’t match Reebok’s new positioning as a casual fitness brand. In 2010, Reebok signaled they would not be renewing its NFL and MLB partnerships and routed those cost savings to sign a deal with Crossfit which had hit mainstream popularity. Hainer was convinced that running, fitness, and basketball would be enough to win the American market.
His decision to give up on the NFL and MLB for Crossift would be a major mistake that Nike happily capitalized on. Nike was popular in college football with its bold Pro Combat uniforms and flashy team sponsorships. Applying that playbook and built-up goodwill to the NFL was a cakewalk billion dollar move for Nike.
To solve the problem of both Adidas and Reebok failing to sell in North America, Hainer switched the target audience. Under Route 2015, the company would prioritize marketing to American high schoolers rather than adults for the next five years. Hainer felt Nike was too entrenched in adults and high schoolers were more viable as the next generation of shoppers.
To go from sponsoring the Super Bowl to back-to-school campaigns and school lockers is certainly one of the bigger head-scratching decisions of the Hainer era. Meanwhile, Adidas was doing well in China but starting to see increasing competition. In Russia, Adidas enjoyed 60% market share but Hainer wanted more.
He wanted complete market penetration, ordering further investment in Russia every year for the next five years. Hainer strangely seemed to have forgotten about being burned by the ruble depreciation just a year ago. Once again, retail was at the core of Hainer’s new strategy.
In his presentation, he preached the importance of winning the customer at the point-of-sale, believing that retail would continue growing double digits every year. More stores, higher productivity, better store experiences, greater presence at malls, and faster shipping to stores. In Hainer’s 35 slides of Route 2015, there was not a single mention of e-commerce.
In its first year, Route 2015 was a success. In 2011, net sales in North America grew 12%, Russia was up 26%, and Asia grew 15%. Hainer’s bet on retail was validated as comparable store sales grew 14%.
Both brands grew at record levels in North America, with Adidas sales up 21% and Reebok over 20%. The market seemed to react positively to the brand’s fitness positioning and new products. Vindicated by these early returns, Hainer used this momentum to expand Adidas’s ambitions.
Seeing the success of North Face and Patagonia, Hainer bought the emerging brand Five Ten for 25 million dollars to enter the outdoor performance market. The following year, 2012, was another strong year for Adidas. Thanks to the London Olympics, the company grossed a record 14.
9 billion euros with 11% growth. Operating margin improved from 7% to 8% year over year. This would have been a perfect year had it not been for Reebok.
Just when the company thought they were home free, they found the final skeleton in Reebok’s closet. During a routine audit, Adidas discovered irregularities in Reebok’s India business. Upon investigation, they uncovered a criminal operation where Reebok management colluded with local partners to inflate the region’s sales and profits.
It was more than just overstating revenue - management intentionally did not record customer returns, skimmed money from accounts receivable, and operated four hidden warehouses of stolen product. This had been going on for years, meaning all of Reebok’s numbers had been misreported. 7 years after its acquisition, Adidas was still paying the price for Reebok mismanagement.
As embarrassing as the scandal was, Reebok’s business was far more alarming. The brand’s success in 2011 turned out to be a flash in the pan, a one year window, a dead cat bounce. Reebok’s sales declined 17% in 2012 after being up 20% the year before.
Hainer’s spin to investors was to look on the bright side, the brand is stabilizing, but it was clear that nothing was working. The marketing wasn’t sticking, Crossfit was not increasing desirability, the brand was unreliable, and the sales too inconsistent. 2012 would be the beginning of the end for Hainer.
In 2013, investors were eager to see how Adidas would perform in a year with no major sporting events, no Olympics, and no international soccer tournaments to boost sales. Hainer put the company through another reorg that year, merging the Retail, Wholesale, and Ecommerce teams within the Global Sales organization. Historically, these teams had been operating as independent siloes but Hainer now wanted an integrated omni-channel approach.
Adidas continued to make progress on running technologies with the launch of the Boost shoe. Reebok continued to flatline despite the company’s efforts. Adidas came up with a new target customer for Reebok called quote “the Fit Generation”, which it defined as consumers young in age or spirit who enjoyed getting fit and staying fit with friends.
Needless to say, this generic persona didn’t land in the market. Reebok also expanded its sponsorship to the trendy Spartan Race, but the company misinterpreted that for most participants, the Spartan Race was more about the social media photo-op than the running itself. Overall revenue declined 3% to 14 billion Euros, sales in North America fell 1%, while Asia and Europe dropped 5%.
Reebok sales continued to free-fall, decreasing 4% year over year. The company was getting further away, not closer to its five year goals. Investors were losing patience.
Feeling the heat, Hainer began publicly questioning his own strategy, acknowledging that perhaps he had been overly ambitious when he set those goals back in 2010. Behind closed doors, Hainer acknowledged to Adidas’s biggest investors that the company was not where they needed or thought they would be 3 years into Route 2015. While he admitted that Adidas had made quote a few mistakes, Hainer pointed the finger at world events beyond the company’s control.
Raw material costs, unfavorable currency movements, the Boston marathon bombing, Tyson Gay’s suspension, Derrick Rose’s season-ending injury, and RG3’s career-ending injury were specifically brought up by Hainer as unlucky incidents that hurt Adidas’s sales in 2013. When the meeting came to a close, Hainer tried to restore confidence in investors. What he intended to be an inspiring closing instead came off as an unhinged rant.
Who else in the industry could do what Adidas is trying to do, he challenged investors. Quote, who in our industry has the insight and know-how to unleash game-changing multibillion long-term platforms like Boost, Clima, and miCoach? Who in our industry has the imagination and creativity to open up the wardrobe of the sports consumer, building not just one, but three highly diverse authentic inclusive brands?
Who in our industry has had the foresight to embrace the world of fitness? ” It was likely this moment in which those investors lost what little remaining confidence they had left in Hainer. At the time, Nike had Jordans, Air Forces, Air Maxes, Converse, Jack Purcell, and Nike Plus.
For Hainer to pound his chest and declare no one else in the industry had anything close to what Adidas had in brands, products, and expertise is a delusional thing to say. In 2014, Adidas’s struggles continued. Despite the Brazil World Cup and sponsoring Pharrel fresh off “Happy”, the company surprisingly regressed in revenue and profits.
Revenue grew at less than 1%. Operating profit fell from 9% to 7% year over year. Adidas was not only entirely off track from its five year goals, it also missed its own sales guidance for the year.
Hainer’s five year commitment to reaching complete market penetration in Russia significantly increased the company’s exposure in the market - and now those chickens had come home to roost. In 2014, the price of oil fell and took with it, the Russian ruble. The currency cratered, triggering a global sell-off of Russian assets, which was worsened by the international sanctions placed on the country for Putin’s annexation of Crimea.
While the 2009 ruble depreciation had cost Adidas 200M euros, the 2014 Russian financial crisis burned the company over double that amount, wiping out 550M euros in net sales. Hainer had lost faith in Reebok management and replaced the executive team once more in 2014. This time, he hand-picked a man by the name of Mark King to revive the American brand.
Mark King lasted 4 years at Reebok before becoming the current CEO of Taco Bell. Mark King at Taco Bell has been widely criticized, controversial, and deeply unpopular with consumers for discontinuing menu favorites like potatoes, Mexican pizzas, triple layer nachos, and the 7-layer burrito in the name of cost-cutting. That should tell you everything you need to know about Mark King as an executive, Mark’s understanding of consumers, Hainer as the CEO who appointed him, and the dysfunctional state of Adidas and Reebok at the time.
Investors were furious and wanted Hainer out. There were no words that could restore their faith in Hainer after 2014’s disastrous results. Hainer had failed to execute, grow revenue, or optimize the bottom-line in the 13 years he had been in charge.
In the past decade, he had bounced from one failing 5-year strategy to another, from multi-brand portfolio in 2005 to the attack on China, America, Russia in 2010. Adidas had lost ground to Nike and at this point, was even losing to Under Armor in the US. As much as investors wanted to blame it all on Reebok for dragging the company down, the reality was that both brands were underperforming.
Incredibly, Adidas’s board renewed Hainer’s contract for 2 more years. Investors were shocked and outraged as to why an underperforming, directionless 13-year CEO should be rewarded with higher pay, longer tenure, and greater job security for progressively worse results. Investors went on the offensive, publicly questioning Hainer’s leadership, calling out Adidas’s mismanagement, and threatening a hostile takeover if a new CEO was not appointed.
In early 2015, Hainer invited investors to Germany to a 2-day event at HQ complete with 5-star hotels, drinks, and private transportation. To an audience of his harshest critics, he revealed “Create the New” his new five-year strategy, the third of his tenure, in a final attempt to keep his job. With “Create the New” Hainer promised high single digit sales growth every year until 2020, 15% increase in net income every year, and a 30-50% dividened payout.
Hainer admitted that under his watch, Adidas had lost touch with consumers. The decision to consolidate Reebok and Adidas under one single operating model back in 2009 had hurt the company’s ability to be agile. Products took too long to reach the market while design and production was too slow and inflexible to adjust to emerging consumer trends.
This new five year strategy was based on three pillars: cities, speed, and open source. Instead of prioritizing growth of individual countries like Russia or China in the past, Adidas would laser focus on six key cities: Los Angeles, New York, London, Paris, Shanghai and Tokyo. These cities were selected as high-profile international destinations that are trend-setters in fashion.
Consumers in neighboring areas, countries, and regions often take inspiration from the celebrities who live in these six cities to determine what outfits or shoes to buy and wear. Global brands, Hainer believed, were created in global cities. If Adidas could win running in New York and Los Angeles, then they would win running in the US.
Adidas would now over-proportionally invest in marketing and influencers in these 6 cities every year for the next five years to restore its relevance and consumer appeal. To support this new localized focus, Hainer reversed the company’s single operating model where everyone was forced to standardize behind one global message back to the original decentralized siloe approach where each group ran its own marketing. Each division from running shoes to Adidas Originals would have their own creative freedom, messaging, campaigns, and budget.
This was another case of where Hainer’s push to consolidate and centralize everything in 2009 backfired. The next pillar was speed. Hainer targeted e-commerce as the next priority with the goal of achieving 2 billion euros by 2020.
To put into perspective just how behind Adidas was, Nike had already achieved Adidas’s five year goal at the time of Hainer’s presentation, surpassing 2 billion euros in online sales in 2016, four years ahead of Adidas. Nike’s own five year goal was to surpass 12 billion euros by 2020. That’s how underinvested e-commerce had been under the Hainer era.
In addition, Hainer demanded a revolution of Adidas’s design and manufacturing processes in order to reduce production times, improve time-to-market, enable product customization, and launch more products in-season. The last pillar was open source. To Hainer, Adidas’s traditional, in-house, meticulous product design worked for its performance products where professional athletes obsessed over every detail and only rotated once-a-year.
But in the world of consumer footwear, this old-school approach was too slow to keep up with consumers and in-house designs lacked the creativity and starpower to become trendsetters. To win consumers, particularly those in the big cities, Hainer mandated collaboration with influencers like Kanye West and Stella McCartney to bring a fresh, unconventional look to the overly-traditional German brand. While Hainer’s three pillars were solid, his five year strategy for winning back North America was uninspiring and puzzling.
Adidas would increase its visibility on the field through heavy grass-roots marketing in American football, lacrosse, baseball, and volleyball. High school locker rooms were the battlegrounds that the company wanted to win. This was another case of Hainer going in circles attempting to fix mistakes four years too late - if the goal was visibility, then he shouldn’t have given up the NFL and MLB to his biggest competitors.
In potentially one of the best examples of modern sunk cost fallacy, Hainer continued to maintain his loyalty towards Reebok. To quote, “Reebok is one of our three main brands. We have been hammered for seven years about it, but we have turned the brand around.
We would be stupid to sell it now. ” [ad] While there was merit and evidence that Hainer had learned from past mistakes in his new five year strategy, investors were not convinced he was the right leader for Adidas. Their offensive continued and the public attacks kept coming.
“Adidas responds to market conditions, but it seems to have forgotten how to set trends itself. Where are the product innovations with which you want to take market share from Nike and Under Armor? The sooner Hainer hands the baton to a success, the better…a new strategy would be believable only with new leadership.
” “Adidas is panting behind the competition. Adidas has lost the race, at least in 2014. ” “Nike is pulling ahead of Adidas, against this background, it is incomprehensible why the board extended Hainer’s contract by two additional years.
” It wasn’t just shareholders who were souring on Adidas, wholesalers had also noticed the company’s declining appeal and were allocating fewer shelf space to Adidas and Reebok products. Under Hainer, Adidas had lost ground to its biggest rival and even newcomers. Retailers would rather stock Nike, New Balance, Lululemon, and Under Armor over Adidas and Reebok, all of which had a material negative impact on business.
Even in areas of strength like European football, Nike was catching up with its sponsorship of FC Barcelona, Neymar, and an exclusive Cristiano Ronaldo boot collection. The public criticism of Hainer from hedge funds and large investors was too overwhelming to ignore. While Adidas initially hired lawyers and advisers preparing for a takeover, the board quickly backed down and gave in investor demands.
Shortly after Hainer’s strategy presentation, Adidas kicked off a CEO search and settled with Hainer to take an early retirement once the new leader was appointed. 2015 turned out to be the most successful and pivotal year in Adidas’s history but for Hainer, it was too little, too late. As a CEO, Hainer had his flaws - he was too reactionary, too stubborn about sunk costs, too loose with M&A, stifled creativity in favor of efficiency, underinvested in e-commerce, and made too many bets which backfired like Russia, retail, and Reebok.
But there was a lot of good that he did in his last year that would revolutionize Adidas forever. Hainer’s nine-year strategic focus on running finally bore fruit in the launch of Adidas’s best product ever - albeit not exactly in the way he had intended. In 2015, Adidas launched UltraBOOST and the shoe became a global phenomenon, widely praised and sought after for its unique blend of high-performance running and fashion.
The iconic silhouette of the Ultraboost, the Primeknit upper, the separated lace cage, and the Boost cushioning technology, had culminated from the nine years of continuous R&D that Hainer had initiated back in 2006. That same year, Adidas also launched the hit NMD as a new lifestyle sneaker with performance elements of UltraBoost. Yet the biggest launch in 2015 was neither UltraBoost or NMD - instead, it was Kanye West with the highly anticipated release of the Yeezy Boost 350s and Yeezy Boost 750s.
Sneakerheads and Kanye fans waited hours in line from London to Chicago for these $200 sneakers, which were sold out online and in stores within an hour. Fueled by the UltraBoost, NMD, and Yeezy 350s, Adidas rocketed to the top in 2015 with 16% growth in overall revenue going from 14 billion euros to nearly 17 billion euros in one year. Consumers fell in love with Adidas, making it the most popular brand on Instagram that year, and retailers took note of the company’s renewed appeal, opening up significant shelf space and purchasing record level quantities of Adidas products for their stores.
Adidas’s 2015 performance was a picture-perfect example of a successful comeback in sports. It’s easy to say that Kanye West single-handedly saved Adidas with Yeezy, but it was an intentional decision by Hainer as CEO to give the musician the creative freedom, autonomy, and resources to create whatever he wanted. That level of partnership and collaboration that not even Nike had been willing to do.
Looking back, if we imagine a world where Hainer had made the right decisions as CEO, Adidas’s already-extraordinary 2015 could have been historic. If the company had kept its NFL and MLB deals, invested in an e-commerce business on par with Nike, and launched UltraBOOST, NMD, and Yeezy, Adidas may have truly eclipsed Nike that year. As poor as Hainer was as a CEO, there’s no denying that he was handing off Adidas to the next leader in its best possible shape.
A company that was struggling a year ago to be cool and relevant now had 3 new best-selling mainstream shoe franchises and incredible momentum. Kasper Rorsted was appointed as the new CEO of Adidas in 2016. Rorsted was a proven CEO best known for his tight control over costs, ruthless focus, and restoring profits at Henkel, a Germany-based multinational consumer goods company.
In 2016, the first year of the Rorstead era, Adidas achieved a record revenue of 19. 3 billion euros, growing 14%. Rorsted, true to his reputation, aggressively sold off what he deemed to be wasteful businesses in the TaylorMade golf brand and the Canadian CCM hockey brand.
In contrast, Hainer had kept those underperforming brands for years in the name of diversification. There was also a strategic shift in marketing strategy with the new CEO. In Hainer’s last year as CEO, Adidas outbid Nike and its competitors to become the exclusive kit sponsor of Manchester United in a landmark deal.
Under the agreement, Adidas pays the English club 75 million pounds every year for the next ten years to produce jerseys. While Hainer saw this as a necessary expense to maintain relevance, Rorsted saw these tit-for-tat deals like these to be wasteful and bring little strategic value. Rorsted recognized that grassroots marketing and social media were making a greater influence on the modern consumer than high-profile sponsorships and cold outbound media advertising.
Adidas decreased its sponsorship budget, gave up the NBA deal to Nike, and routed those cost savings into funding limited time collaborations with creators and inventing new shoe franchises. Rorsted was brutally upfront about where Reebok stood in his eyes. The brand had no growth in North America, its home market, for several years and its margins were significantly below the company’s average.
Growth was a lost cause and tweaking messaging and positioning would be pointless. The best Reebok could aim for was to restore profitability. Rorsted rolled out a cost-cutting plan for the American brand that he named “Muscle Up” which included shuttering 50% Reebok stores across three years.
Meanwhile, the momentum continued for NMD, Yeezy, and UltraBOOST with new colorways and models that continued to dazzle consumers around the world. [ad] Adidas continued to reach new heights in 2017, growing 7% in overall revenue from 19 billion euros to 21 billion euros. New UltraBOOST, NMD, and Yeezy shoes accounted for 77% of Adidas brand sales yet Rorsted noticed that the longer the models lasted on the market, the faster the price dropped, and the lower the margins became.
To counter this, the company expanded its creator network, launching limited collections with Alexander Wang and Stella McCartney. Rorsted saw these one-time collaborations as invaluable to maintaining profits and relevance. By launching new models, collections, and limiting the quantity available every season, Adidas could maintain its gross margins and extend the lifespan of the UltraBOOST, NMD, and Yeezy franchises through scarcity.
Having a large pipeline of new in-season products, especially shoes, became critical for Adidas’s success. Rorsted adjusted R&D to support this new luxury approach, replacing the traditional development of products in advance of seasons with in-season production and rapid replenishment manufacturing. By 2017, the majority of UltraBOOST and NMD shoes were manufactured with a lead time of 60 days or less.
With greater desirability, luxury positioning, and intentional scarcity comes greater pricing power. Adidas began shifting its business towards its full-price premium products by issuing fewer discounts to retailers who had no choice but to accept the terms. Meanwhile, North America was surging.
The company’s sales in the region were growing 25% every year for the past 3 years, going from 2 billion euros in 2014 to 4 billion euros in 2017. From 2018 to 2019, Adidas enjoyed stellar years, achieving for the first time in company history, 9% growth and double digit operating margins back-to-back. Investors were delighted as Rorsted delivered the top-line and bottom-line what Hainer could not.
Yeezy became a forcing function and driver for Adidas’s e-commerce business as the company began doing digital drops of its most-coveted products like the Yeezy Boost 350 v2 Triple Whites. UltraBOOST continued to flourish, releasing the widely praised UltraBOOST 4. 0 which many consider to be the franchise’s best model alongside a limited edition Game of Thrones collection during the show’s peak.
Adidas formally entered the high-end outdoor market with its MyShelter line to compete with Patagonia, Arcteryx, and North Face. To this day, Adidas’s success continues but there are signs of staleness. Just by a function of age, UltraBOOST and NMD have lost some of their shine amongst sneakerheads and consumers.
While Adidas signed Beyonce and Ninja as part of its creator sponsorship strategy, neither collection has reached the success of Yeezy. While Reebok continued to make progress on its profits, Rorsted had seen enough and eventually sold off the brand at a loss for 2. 5 billion dollars in 2021 to a fashion brand conglomerate.
Having finally shed Hainer’s 15 year mistake, Rorsted’s new company vision is a single-brand focus on Adidas with greater emphasis on e-commerce and international growth - adding 6 more key cities to win in Mexico City, Berlin, Moscow, Dubai, Beijing, and Seoul. While the future remains bright, there are new questions and challenges emerging. Can UltraBoost last another 5-10 years?
Will Adidas still be the one to invent the next winning shoe franchise? How far will Ye’s innovation and eye-catching designs carry Adidas in the future? Rorsted has proven to be a strong operator, but the company needs a visionary - is he good enough to chart a path forward?
How much of Adidas’s success today should be credited to Rorsted when he inherited Kanye West and UltraBOOST, creative bets made by his predecessor Hainer?
