By Andrew Mernin
Whether he's battling with Nike, tackling scandal or sponsoring the biggest sporting event in the world, there's never a dull moment for global Adidas CEO Herbert Hainer.
It may be a few years since Herbert Hainer left behind a promising football career to pursue a life in business, but he certainly hasn’t lost his competitive edge.
“Of course we want to be number one,” he says of his battle to overthrow the Nike empire dominating the world of sports fashion. Although Adidas maintains pole position in the Middle East market, the three-stripes are currently around US$1.9bn behind the swoosh in the race to be the top-selling sporting brand on the planet. But Hainer, Adidas chairman and CEO, thinks he has the tactics to overtake his rival.
“I believe we are growing faster than Nike in Asia and Europe which will help us close the gap, we’re the market leaders in Japan, and I think the next place we will take our market leadership will be China and Korea. And then we have to work in America to close the gap there,” he adds. While “emerging markets like China, Russia, Turkey and India” are the main drivers in the group’s race for top-spot, perhaps the biggest threat to Nike’s throne was Adidas’ acquisition of Reebok in 2005. In what was probably the biggest managerial decision of Hainer’s six-year CEO tenure, Adidas bought the struggling Anglo-American group for US$3.8bn. This inflated the German giant’s global value to US$11.5bn, although Adidas was forced to reduce its 2007 profit forecast from 20% to 15% to invest money into developing Reebok. “We really have to put emphasis now on rebuilding the Reebok brand because it’s now number three in the market and has been hurt by Nike and Adidas in the past.”
“The company has been too focused on the US market and hasn’t taken care of Europe or Asia where they left the business with distributors and licensees – you need to control it by yourself,” adds Hainer.
According to Hainer, taking over Reebok allowed his company to save around US$47m in costs last year, although this was partly cancelled out by one-off costs of closing down subsidiaries or bringing them together. This year, the Reebok acquisition is expected to save Adidas US$97m and US$226m by mid-2009.
Although Adidas is the best-selling sports brand in the Middle East ahead of rivals Nike and Puma, Hainer insists the company intends to step up its game plan in the region in the next few years. “When you see the development in the Middle East with all the new malls, of course we want to have a presence here,” he says. Over the last fifteen years the gross leasing area of shopping malls in the GCC has increased ten-fold and, by 2012, is expected to have trebled. And this has been mirrored by Adidas’s ongoing growth in the region. Between 2002 and 2006, the company grew 200% in the UAE, 300% in the KSA and 150% in the GCC as a whole.
Stating the reason for his visit to the company’s Dubai headquarters as a “progress update,” Hainer admits that Adidas has had to adopt a mono-brand retail strategy to suit the Middle East’s market. “Single-brand stores are special to emerging markets mainly because in places like Europe for example, you have a well developed infrastructure with multi-branded retailers.
“You don’t have that in emerging markets so we have started to build a mono-brand infrastructure alongside other brands like Nike and I think it will be more difficult for multi-brand retailers coming to this market in the future.” By 2008, Adidas aims to double the number of its retail stores in the region to 18 and triple the number of mono-brand franchise stores to 27.
As the CEO of one of the most recognised brands in the world, Hainer has the mammoth task of deflecting anything that could harm Adidas’s reputation. And he has had to deal with a few difficult issues in his time including allegations over the poor treatment of its sub-contracted Third World workforce. In a European Parliament hearing in 2000, Adidas was criticised over allegations that one of its factories in Indonesia employed children to work 15-hour daily shifts for less than US$60 a month. Similarly in 1999, a Bangkok factory worker claimed she worked 12-hour shifts for less than US$2 a day while being poorly treated by factory management. Having occupied the Adidas CEO berth since 2001, Hainer insists he has made it a priority over the last six years to improve the company’s treatment of its overseas workers – and eradicate such brand-damaging headlines.
“We’ve worked very hard to get a good relation with our third party people, the stake holders and the NGOs and we have introduced a so called ‘standard of engagement’ which we have been publishing for four years – this is an annual 60-page report on what we are doing on all fronts in terms of child labour, forced labour, minimum wages and social standards,” he says. “There’s not much criticism any more and we are moving towards these targets quite fast,” he adds.
According to speculation from some sections of the media, Adidas’s Teamgeist football, the official ball of the 2006 world cup, costs somewhere in the region of US$5 to manufacture and retails at around US$110. While Adidas representatives refuse to confirm the actual manufacturing cost, there is no doubt that the company operates in an industry where profit margins are particularly high. But Hainer insists that despite low operational costs, retail prices are justified. “We want to make our margin and the retailers want to make their margins, then the football clubs want to get the royalties as well so do not believe that all the money that is between the production cost and the retail cost covers our profits,” he says. In fact, according to a 2006 Datamonitor report, Adidas actually had a lower profit margin in 2005 than its industry peers. The company’s EBIT margin (the ratio of earnings to sales before interests and taxes) was 10.7% compared to Nike (13.8%) and Puma (22.4%).
The beautiful game
Ever since the German national football team won the 1954 FIFA World Cup wearing Adidas boots with revolutionary screw-in studs, the sporting giant has made the football market one of its main priorities.
Sponsorship at last year’s World Cup in Germany helped Adidas sell 12 million official footballs and three million replica jerseys while making US$1.5bn in European football sales. And Hainer believes the success of Adidas owes a lot to its long-term relationship with football’s governing body, FIFA. “I think our relationship with FIFA is now 50 years old – it’s one of the best relationships a sponsor could have. We have the rights for the World Cup until 2014 and we pay around US$100m for each four year period in which there are 17 World Cups including the women’s, and the beach soccer tournament.” While the football market in the Middle East may not be as lucrative as in other parts of the world, Hainer admits that he is excited about the potential for growth in this region. And Adidas is playing a major role in helping the Arab world establish itself on the world football map. Last month, the company sponsored the Dubai Football Challenge, a football tournament that saw European giants Bayern Munich, Benfica, Olympic Marseille and Lazio head to the UAE.
Events like this alongside the development of projects such as Dubai Sports City, that will house a football stadium and football academy, mean that the Middle East football bandwagon is certainly in motion. For Hainer, the challenge over the next few years will be to cash in on the impending Arabian football boom.
The company currently sponsors a number of the region’s football clubs, including the Abu Dhabi-based Al Jazeera Club. But, according to Hainer, this is only the beginning for Adidas in the region. “We are growing so fast here. We have people here who are working hard in the Middle East and I have every confidence in them.” Born on the eve of the 1954 World Cup final in Germany, Hainer is a man with football in his blood – as a player he made it to the dizzy heights of the German third division with local team SV Landshut. But can the man responsible for the commercialisation of football still enjoy the beautiful game?
“Absolutely! During a game I can forget the commercial aspect immediately and enjoy it,” he says. Something tells me if Hainer could defeat Nike and make Adidas the biggest sports fashion label in the world, he would enjoy sport a lot more.