Ottawa Citizen

Adidas takes a run at Nike

In the footwear battle, Adidas is the new investor darling — but Nike still reigns supreme


The top-selling shoe on the market in 2016 didn’t come with any revolution­ary technology. It wasn’t part of a collaborat­ion with Drake, Rihanna, Kanye West or the many other celebritie­s and artists putting their stamp on footwear these days. And it definitely wasn’t something new.

It was the Adidas Superstar, a streetwear staple known for its three stripes and iconic shell toe that dates back to 1969. It doesn’t come with a hefty price tag, so you’ll find the Superstar on the feet of toddlers, teens, millennial­s and the older crowd that might even remember when legendary rap group Run-DMC wore them unlaced back in the late 1980s.

More importantl­y, the success of Superstar is part of a broader resurgence for Adidas AG that has a growing number of consumers and investors switching from “Team Nike.”

Long considered by many to be a euro- and soccer-centric niche player, Adidas has been a big winner in the increasing­ly popular athleisure fashion trend, where clothes and sneakers designed for exercise are instead worn for work, school and elsewhere.

The German sportswear giant’s rise hasn’t gone unnoticed by the market: the stock is up more than 65 per cent in the past 12 months and has more than doubled since the start of last year, while Nike shares have languished.

A big reason Adidas has become an investor darling is the fact that it’s making a real run at “The Swoosh” on its own turf. This is evident in Adidas’ 20 per centplus growth in core regions such as North America, Western Europe and Greater China.

“Adidas continues to clearly outgrow Nike globally,” said Chiara Battistini, a retail analyst at J.P. Morgan. “This has been a key revenue and profit driver for Adidas.”

But if the Superstar’s spot atop the shoe list symbolizes Adidas’ growing popularity and the success of its marketing efforts, the rest of the Top 10 list tells a different story.

Not only is it dominated by Nike shoes — it is entirely Nike shoes.

Those include the Air Jordan Space Jam 11 — the company’s biggest sneaker launch ever, which coincided with the 20th anniversar­y of the live-action/animated movie of the same name.

Various Nike running shoes also made the Top 10, as did the classic Converse (owned by Nike) Chuck Taylor All-Star Low, and the Air Force 1 low — the first sneaker to ever be reissued and the best-selling athletic shoe in history.

The list, courtesy of Matt Powell, a sports industry analyst at The NPD Group, only includes the U.S. and simply tracks units sold, not how profitable the shoes were for Nike and Adidas. But it nonetheles­s serves as an example of what’s happening in the increasing­ly competitiv­e battle for sneaker and sportswear dominance.

And what’s happening is that Nike is reigning supreme, despite its competitor’s gains.

“While I expect Adidas to continue to thrive in the U.S. and Nike to struggle, Nike’s U.S. share lead is not in jeopardy,” Powell said. “Outside of the U.S., Adidas and Nike are in a much closer race. That business is up for grabs.”

Nike’s North American position is about as dominant as they come. In 2016, it held 50.8 per cent of the U.S. retail brand footwear market, while Adidas improved its share to 7.4 per cent.

Nike also maintains a significan­t lead in revenue, with $32.4 billion in annual sales in fiscal 2016, compared to about US$20.6 billion for Adidas.

“The sales momentum Adidas is experienci­ng is undeniable and well known at this point,” said Camilo Lyon, an analyst at Canaccord Genuity. “The key question going forward is duration — how long can Adidas sustain its growth rate before Nike responds forcefully?”

The additional shelf space brands like Adidas and Under Armour continue to take each quarter likely comes at Nike’s expense. But it’s not going unnoticed, as Nike understand­s the shifting market dynamics, both in terms of the digital disruption that is changing how people shop, and the competitiv­e landscape.

That’s why Nike is dramatical­ly cutting the time it takes to bring new products to market in order to stay up with current trends. At the same time, the company is successful­ly growing its outlet and ecommerce business, even as sales with wholesale partners soften, owing in part to weakness in the performanc­e basketball segment the company has long dominated.

Nike remains the major player in basketball, and while Adidas has made some gains, they haven’t been as significan­t as Nike’s encroachme­nt on Adidas’ soccer business.

Nike’s success there is partly due to its ownership of hot properties such as sponsorshi­ps of the Brazil and English national teams.

But basketball is Nike’s bread and butter: It continues to grow its retro basketball business by increasing the number of pairs in the market. Whether sneaker connoisseu­rs like it or not, there has been an increase in Air Jordan shoes hitting the market.

“While this might have contained the share ceding to some extent, we believe this is not the way to maintain the integrity of Brand Jordan,” Lyon said.

Sneaker lovers will be quick to tell you that whatever integrity “Brand Jordan” had was compromise­d many years ago. Yet they’re still willing to spend days in line, hours online, and thousands of dollars on Air Jordans that have decades-old technology, often poor quality control, and were worn by a player that retired in 2003.

The Jordan Brand generated US$2.8 billion in revenue last year, an 18 per cent annual increase, and roughly double what Nike Basketball brought in, even with superstar talent such as LeBron James and Kevin Durant. So it’s no wonder Nike wants to push Jordan Brand revenues to US$4.5 billion by 2020.

The stability of the Jordan brand is only one of Nike’s advantages.

From an investor point of view, Nike has a better debt position, generates more cash flow relative to sales, and is 2.5x times the size of Adidas in terms of market cap.

Nike is also much cheaper than Adidas on a price to earnings basis, with the stocks trading at 23.4x and 34.9x, respective­ly. The swoosh also generates a 32.6 per cent return on equity, compared with 16.8 per cent for the brand with three stripes.

Of course, Adidas does have plenty working for it, beyond just the Kanye West-designed Yeezys and super-comfy Ultra Boosts and NMDs.

Much of the company’s recent success is the result of its momentum in fashion and the popularity of lifestyle products that represent the core of its offerings.

Several analysts downgraded Nike in 2016 for just this reason: Adidas was capitalizi­ng on a consumer shift away from performanc­e products, which happen to be Nike’s expertise.

But that also presents a risk, as an over-reliance by Adidas on fashion and non-sports performanc­e styles in apparel and footwear, could constrain future growth and margins.

“Our narrow moat is based on the brand’s durability and pricing power developed through nearly 80 years of sports sponsorshi­ps and results, not on fashion trends or pop music star sponsorshi­ps, which we view as much less durable because of changes in tastes and preference­s and the potential to be competed away by other brands,” said Jamie Katz, an analyst at Morningsta­r.

The NPD Group’s Powell insists Adidas’ success in the U.S. is really about great product, not about paid endorsemen­ts.

But the impact of celebrity on the market shouldn’t be discounted.

Adidas unveiled the Ultra Boost as the “greatest running sneaker ever” in January 2015, but it wasn’t until West was spotted wearing the shoe, that it started flying off store shelves.

Yeezys — West’s branded line with Adidas — may be the hottest name in the shoe game these days, but Air Jordans have been consistent top sellers for more than 30 years, and they are produced in vastly higher quantities.

In a US$55 billion industry where market share and profits mean more than margins, keeping your competitor from gaining that kind of long-term traction with consumers is crucial.

That’s Nike’s role, and it has the arsenal to do it.

The key question going forward is duration — how long can Adidas sustain its growth rate before Nike responds forcefully?

 ?? PAUL HAWTHORNE/GETTY IMAGES FILES ?? Adidas is making a real run at Nike with its 20 per cent-plus growth in core regions such as North America, Western Europe and Greater China.
PAUL HAWTHORNE/GETTY IMAGES FILES Adidas is making a real run at Nike with its 20 per cent-plus growth in core regions such as North America, Western Europe and Greater China.

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