Can Adidas Get Back On Track After Dropping Kanye West?

The first of these is the tainted Yeezy franchise. Adidas said on Friday it risks losing millions of dollars after canceling its profitable partnership with American rapper and fashion designer Kanye West, which officially changed its name in 2021.

The separation was caused last year by anti-Semitic comments from the West on social media that sparked a global outcry. Other international brands such as Gap, Balenciaga and Foot Locker also ended their business relationships with West and withdrew products bearing his name. Meanwhile JPMorgan decided to end its banking relationship with West.

Adidas’ profits were more dependent on its partnership with West than other companies the rapper had signed with. The iconic trainers from the Yeezy line are often sold for thousands of dollars on the resale market.

The German company, which is second only to Nike in the sportswear market, has now said the risk of writing off unsold Yeezy inventory could wipe out half of its 2022 earnings.

If it cannot sell this inventory, it expects to lose $1.3 billion in revenue and about $535 million in operating profit this year, although the dissolution of the partnership will save it an estimated $300 million in marketing expenses and royalty payments.

This is adidas’ fourth profit warning since July. In November, it announced plans to raise around one billion euros in debt after leaving the West.

The company was already going through tough times because of its decision to pull out of Russia following the invasion of Ukraine last February, and because Beijing’s zero-Covid policy in 2022 has slashed consumer spending and hit sales. was impressed.

Adidas was the market leader in Russia, with sales of over $534 million a year. China is an even bigger market, bringing in over $5 billion in revenue annually. But even there it is in trouble. It is losing market share to domestic competitors and Chinese players are distancing themselves from the company.

Before China’s zero-Covid policy hampered its sales, which are expected to fall by $3 billion this year, it drew anti-Western criticism for refusing to buy cotton from the Xinjiang region in the face of international concerns about forced labor. Consumer sentiment suffered. camps and other human rights violations there.

However, Yeezy’s failure was avoidable. It provides a lesson in reputational risk for companies, especially those that rely heavily on single-brand cash cows.

Adidas recognized and discussed internally in early 2018 that the West had exposed this as a reputational risk – they issued a public apology that year for calling 400 years of slavery “like a choice”. .

But the super-successful franchise beat the 2019 recession, after which Adidas increased its marketing budget on the brand and added massively to the Yeezy collection, even expanding it to South America and the Middle East. As a result, from making up 3% of annual sales in 2019, profitable Yeezys are set to comprise 7% of the group’s revenue in 2022.

Adidas, thus, knew for years that it relied heavily on risky brands and that this could hurt profitability, but did not disclose this sales structure to investors in stock exchange filings. It forged alliances with new celebrities including Beyoncé, Jerry Lorenzo and Pharrell Williams, but none proved as catchy as Yeezy.

Managing reputational risk often proves difficult even for sophisticated companies because it elicits more informal responses from management than financial risks.

Now all eyes are on new CEO Bjorn Gulden, who joined adidas last month, replacing Kasper Rorstad, who had held the position since 2016. By 2019, Rorsted had seen a two-fold jump in operating profit, narrowing the gap with Nike. Cut costs, including R&D, and increased marketing spending before running into trouble.

Gulden, a 57-year-old Norwegian and former professional soccer player, led Puma – the world’s third largest sportswear company – through a legendary turnaround. Puma, incidentally, was started by Rudolf Dassler, the brother of Adolf “Adi” Dassler, the founder of Adidas. The global sporting goods sector is growing almost twice as fast as GDP, opening opportunities for Adidas to emerge from the current crisis and rebuild. ,