Strategic Analysis of Lululemon
Prepared by: ShahnamTaheri
1-The resource-based model assumes that each organization is a collection of resources
and capabilities, which provide the basis for a firm’s strategy and its primary sources of
above- average returns. Use this model to outline Lululemon’score competencies and how
their capabilities will need to evolve to sustain above-average return.
2-Strategic competitiveness results when the firm is able to satisfy a group of customer by
using competitive advantages in a given market. Describe Lululemon’s relationship with its
customers and how their business level strategy demands they continuously meet and
exceed client expectation (factor client insight, richness and affiliation dimensions in your
“Reach is the degree to which a firm can manage its value chain activities to connect its
customers to an accessible product/service offering” (Wells and Gobeli, 2003). In other words, it
is not only the ability of customers to reach the firm but also the firm‟s ability to reach the
customer with its products and services. For example, the music industry has traditionally
marketed, sold and distributed it product offering while ignoring the digital transmission
The second issue is affiliation. Affiliation is a product of Internet culture and the greater
transparency of e‐commerce. For example, book publishers have long promoted particular books
in bookshops and no‐one has raised a murmur.
The third issue is richness. “Richness is the degree to which a firm can facilitate the exchange of
information to deliver products/services that match customers‟ exact wants and needs” (Wells
and Gobeli, 2003). For example, the interaction between a local tailoring shop and its customers
is extremely rich as they can easily observe preferences and produce a customised product
accordingly. The challenge is to identify the attributes conducive to the digital medium and lever
3- What can Lululemon do to defend its leadership position in this market and retain its
dominant player status? What threats do competitors like Lotus wear,GAP,etc pose for
Becoming More Global
Becoming More Innovative
Investing in High-Growth
Greater understanding of local laws and business arrangements
in strategy making
Greater interdependence among leaders to create more
effective collaboration across functions in bringing new
products to market
Need to increase leadership involvement across functions in
gathering consumer insights and translating these into profitable
ideas for new products
Must anticipate capital, space, talent implications of rapidly
expanding product portfolio
Need cultural change to create a spirit of innovation versus a
culture of risk aversion at top levels of the organization
Need to develop and implement new processes for
understanding customer experiences and translating them
into improved business practices
Must create solid linkages across the organization at all
customer touch points, so that the customer experiences a
Need to understand the needs of different customer segments
and move beyond “one size fits all” approach
Must instill a culture of customer primacy and customer care
Rapid growth requires attention to talent development;
must accelerate the acquisition and development of talent
for key roles to avoid talent becoming the constraint to
Must grow number of leaders at every level by 10% per year
over next three years
Must introduce Six-Sigma, lean manufacturing and other
methods to bring costs into line with key competitors;
these must be led from the top and supported by leaders
at every level
Must create a culture of continuous improvement that is led
INTRODUCTION OF LULULEMON
lululemonathletica Inc. (Lululemon), a yoga-inspired athletic apparel and accessories
manufacturer and retailer, was founded in 1998 in Vancouver, Canada.
In 2007, thecompany owned or franchised 81 stores internationally.
Lululemon‟s mission was “to create components for people to live longer, healthier, and more
fun lives”, based on core values of quality, product, integrity, balance, entrepreneurship,
greatness, and fun.
Lululemon produced high-quality, innovative products meant to inspire physical activity in
yogis and athletes. The company created a manifesto to capture the essence of the
Lululemon culture and inspire customers to consider changes to improve their own lifestyle.
The manifesto can be found in Appendix 2. Ideas like “a daily hit of athletic-induced
endorphins gives you the power to make better decisions, helps you be at peace with yourself,
and offsets stress”; “that which matters the most should never give way to that which matters
the least”; and “successful people replace the words “wish”, “should” and “try” with “I will””
were part of the manifesto and part of the Lululemon brand religion.
The company targeted “Super Girls”; the daughters of the 1980s “Power Women”. These
educated, hard-working women lived healthy lifestyles by working out, eating right and taking
care of themselves.
Lululemon opened lines of men‟s clothing and accessories, but still remained highly
dedicated to its core market of “Super Girls”. Lululemon‟s founder, Dennis “Chip” Wilson,
1-"Who is Lululemon Athletica?." Lululemon Athletica. Lululemon Athletica, Inc., Web. 4 Feb
"Lululemon Athletica, Inc. - Annual Report." www.shareholder.com. 23 Feb 2008.
Shareholder.com a Nasdaq
OMX Company. 13 Mar 2009 <http://investor.lululemon.com/secfiling.cfm?filingID=909567-
"Lululemon Athletica Media Kit."Lululemon Athletica Media Site. Oct 2009. Lululemon
Athletica, Web. 4 Feb
"Lululemon Manifesto". Lululemon Athletica, Inc. June 22, 2008
Suppa, Julia. "The Lululemon Love Affair".Digital Journal. June 16, 2008
Wilson, Chip. "Lululemon Blog." How Lululemon Came Into Being. 30 Mar 2009. Lululemon
Web. 4 Feb 2010. <http://www.lululemon.com/community/blog/how-lululemon-came-into-
being-a-grossgeneralization/>. oikos Global Case Writing Competition 2010 2
Lululemon designed and produced “technical athletic apparel for yoga, running, and
dancing.” The company initially became popular for its well-fitting black workout pants. In
addition to workout pants, the company sold workout bras and tanks, shorts, capri pants, tshirts,
sweatshirts, jackets and other pieces of apparel for men and women. The company
also produced a line of accessories including water bottles, head gear, yoga mats and
accessories, and yoga and gym bags.
Lululemon took pride in using innovative materials to manufacture its products. The company‟s
most well-known and often-used fabric was Luon®, a moisture wicking fabric that was used for
most of its pants, shorts, tanks, and bras.
A more innovative fabric the company used was Silverescent®, a fabric made with silver
yarn, designed to eliminate bacteria and remove odor from the fabric.
The average price for a pair of Lululemon pants was $99USD, bra was $48USD, tank was
$52USD, and jacket was $98. Lululemon‟s line of accessories ranged from water bottles sold for
$25 to bags as expensive as $88.10 Lululemon declared “Social Responsibility is our DNA” on
its corporate website. The company felt responsible to all stakeholders: employees, customers,
vendors, suppliers, stockholders, and the environment. Lululemon further supported its
commitment to social responsibility on its website: “It is who we are and what we do and we will
continue to further our mission of „creating components for people to live longer, healthier and
more fun lives‟....both for our guests, our employees, and our manufacturing partners.”
2007 proved to be a financially stellar year for Lululemon. Total Assets had more than
doubled, from $48,492,745 in the beginning of 2007 to $97,906,418 by the end of the 2007
fiscal year. Net Revenue had increased during the same time period by 45.8%, while Net
Income posted a 75.1% increase. A Financial Analysis for the company can be viewed in
Appendix 3. The company continued an aggressive expansion strategy, focuse
LULULEMON‟S PLAN FOR SUSTAINABILITY AND
CORPORATE SOCIAL RESPONSIBILITY
From its inception, Lululemon had extensive plans for incorporating sustainability into the
overall strategy of the organization. Corporate Social Responsibility was at the heart of
Lululemon. The company named its Corporate Social Responsibility strategy “Community
Legacy”, and Lululemon‟s business processes were centered on the five elements described in
the Community Legacy initiative: community, people, sourcing and manufacturing, efficiency
and waste reduction, and green building and spaces.
Lululemon specifically focused on
three elements of the Community Legacy initiative as it related to sustainability: sourcing and
manufacturing, efficiency and waste reduction, and green building and spaces.
Sourcing and Manufacturing was developed around a three year strategy aimed at
working with suppliers that not only shared Lululemon‟s vision and values, but that complied
withLululemon‟s Workplace Code of Conduct, developed internally by Lululemon
executives. Lululemon was committed to only work with suppliers that were as concerned
about the environment and human health as Lululemon. The company set a high level of
expectations; therefore, suppliers that wanted to work with Lululemon had to meet specific
requirements, and were continuously audited by Lululemon to identify areas of weakness and
opportunity. Lululemon created a Social Responsibility Compliance ranking to assess
suppliers and manufacturing partners, and evaluated each partner out of a possible score of
100. The scorecard was broken down into four sections: labor practices, environmental
responsibility, and health and safety.Efficiency and Waste Reduction was also at the core of
Lululemon‟s Community Legacy initiative and overall strategy. The five year vision for this plan
included a high level of product and process innovation to reduce environmental pollutants in
garment manufacturing and retailing. The company worked on implementing an internal
environmental guide and clause in the Workplace Code of Conduct for compliance by both
Lululemon and its suppliers. In addition to constant innovation of design, packaging and
shipping processes were constantly scrutinized in order to find the best possible way to
decrease the company‟s environmental impact. Lululemon also implemented measurement
tactics and benchmarks as indicators of the company‟s environmental footprint, and to
identify areas where improvements could be made. Finally, Lululemon set up networks
between itself and environmental experts and NGOs to facilitate idea sharing about process
and product improvements, and to foster ongoing conversations about corporate socia
Green Buildings and Spaces was the final component of Lululemon‟s Community Legacy
initiative. The company had a five year vision for LEED (Leadership in Energy and
Environmental Design) designed buildings and spaces for new construction, and motivated
existing departments and retail locations to aim for zero waste and emissions through the
implementation of an internal building guide and the Building Code of Conduct; which
encouraged paperless communication along with recycling and paper reduction programs,
natural building and maintenance materials sourcing, and existing facility retrofitting for
improved energy efficiency. Lululemon set a corporate goal of 95% zero waste efficiency in
operations by 2010.4
The main industry in which Lululemon competed was NAICS
The main industry in which Lululemon competed was NAICS 315999 - Other Apparel
Accessories and Other Apparel Manufacturing. The industry elasticity, an indication of price
sensitivity within the industry, for 2007 was 3.8%, a 0.4% decrease from 2002, whereas
Lululemon‟s own price elasticity in 2007 was 18.2%.
This observation proved that
consumers of these apparel products had become more sensitive to price adjustments, but
buyers of Lululemon products were not sensitive to price adjustments at all. Although the
industry was extremely competitive, the demand for the Lululemon products was less
sensitive to price increases than the rest of the industry. Perhaps the largest barrier to entry
in this industry was the existence of dominant brand names such as Nike and Under Armour;
however, Lululemon continued to increase its market share, seemingly quarter by quarter.
Lululemon experienced higher gross margin at 51.7%; as compared to the industry‟s 37.7%;
quarterly revenue growth at 34.1% versus the industry‟s 7.3%; and a price/earnings ratio of
10.3 as compared to the industry‟s 8.1,13 indicating that Lululemon was valued higher than
the industry in which it competed. These numbers excited investors and analysts alike, and as
a result, Lululemon became one of NASDAQ‟s star performers in 2007.
SMARTFIBER AG, SEACELL®, AND VITASEA
I- CORE COMPETENCIES & COMPETITVE ADVANTAGE
Competitive advantage is a special edge that allows an organisation to deal with market and
environmental forces better than its competitors. Whereas, sustainable competitive advantage is
one that is difficult for competitors to imitate. This distinction is essential when evaluating the
acquisition and its effects.
A merger of this scale is inherently complex, dealing with issues such as global positioning of
companies, corporate cultures, and the allocation of resources. To better understand the
advantages gained from the Adidas-Reebok merger, we have examined the following: Through
these various analyses, we have discovered that the importance of branding is paramount for
success in this industry. Our research also identifies the specific danger of competition between
Adidas and Reebok.
Our analysis of the Adidas-Reebok merger shows how it will gain a sustainable competitive
advantage that may one day dominate the footwear industry both domestically and
internationally. The fact that Adidas and Reebok control such different aspects of the shoe
industry will help to ensure their success.
To fully understand how Adidas-Reebok will gain a sustainable competitive advantage over
Nike, the situation must be looked at from several different points. These include industrial,
customer and competitor analyses, as well as a look at the different marketing strategies and
changing marketing trends.
Adidas Core Competencies
– Customer focus
– Brand recognition
– Supply chain
– Collaboratively competitive
Reebok Core Competencies
– Trend Identification
– Ability to market to a niche segment
– Women's shoe design
– Design expertise
– Celebrity relationships
Combining Core Competencies
– Adidas technology with Reebok design
– Adidas sports with Reebok women's market
– Adidas shoes with Reebok apparel
– Adidas global strength & Reebok US strength
Blending the two cultures successfully (learning to work together)
Protect the strengths of acquired company (keeping development of both organisations separate)
Maintaining both brands (keeping established market share)
Capitalising on supply chain economies of scale (suppliers, manufacturing, distribution,
Nurturing the partnership between technology and design (growing market share by combining
Sustainable competitive advantage
The athletic apparel and footwear industry emphasises branding more than any other competitive
advantage. Through the use of advertisements, endorsements, promotions, and licensing
agreements, the top companies in this industry have devoted much of their resources to brand
recognition and loyalty. Adidas' acquisition of Reebok will develop increased opportunities to
achieve competitive advantage through branding. Furthermore, extended licensing agreements
and contracts will allow the Adidas Group to sustain this advantage.
Sustainable competitive advantage cannot be reached without the successful merging of Adidas
and Reebok. The key to this success is how well they identify themselves. There is a very real
danger of cannibalisation to occur between the two separate brands, where one brand takes away
the others consumer base. However, Adidas Chairman and CEO Herbert Hainer made clear that
"it is important that each of these brands must retain their own identity."
Hainer points out that Reebok's focused strategy is on the engagement of youth through sports,
music, and technology. Reebok, he points out, is a lifestyle brand. On the other hand, Adidas'
focus is on superior technology and performance, coupled with a large international presence.
As Hainer points out, "Adidas has positioned part of its product range in the lifestyle segment,
but thecompany relies on the performance market. Lifestyle success to an authentic company is a
Adidas will benefit from increased distribution in North America, where Reebok already has a
significant presence. The addition of Reebok will enhance not only its position among the top US
distributors like Foot Locker and Dick's, but will also give Adidas-Reebok more power over
promotions and in-store displays. Increasing its presence is the key to achieving sustainable
competitive advantage, because the increased presence further engrains the most important
advantage in this industry, brand name.
The acceleration of both brands is brought about through increased operating cash flows. Along
with the increased operating capital, other synergies such as operating savings are realised.
Catching up to Nike's huge marketing budget is a challenge, but the increased operating costs
coupled with the synergies will help promote further brand recognition through marketing.
Reebok has an extensive line of men and women's apparel. The new company can combine
Reebok's apparel with Adidas' new addition of fashion designer Stella McCartney, who has
created an apparel line that integrates both sport and style. This innovative move shows that
Adidas continues to look for new opportunities and markets in order to gain a competitive
In the past, Adidas has not been able to expand because it had problems shipping goods to the
United States. It takes them about 14 days to ship from their factories in the Far East while
Reebok can ship overnight. In the future, Adidas will be able to take advantage of Reebok's
existing distribution infrastructure in the U.S., while Reebok will be able to benefit from Adidas'
existing distribution infrastructure in Europe.
The Reebok brand will also gain sustainable competitive advantage through increased brand
recognition. Globally, Reebok will benefit greatly from Adidas' distribution around the world.
Coupled with the cost savings and increased cash flow, Reebok's marketing resources could
Combined R&D is helping speed development of cutting edge technologies, an important feature
of the increasingly fast paced industry. Expedited research will develop higher consumer demand
for innovation across all brands, putting pressure on Nike's R&D capabilities.
II- FROM CORPORATE TO MARKETING STRATEGY
Porter's Five Forces
Barriers to Entry - Low
Adidas and Reebok combined are able to control their costs effectively, giving them an
advantage over emerging competitors in the industry. Their web sites are well- prepared and
updated promotions attract online shoppers. There are many exclusive product differences in this
industry that gives brand identity an immediate competitive advantage. The Adidas and Reebok
brand is well-known globally and plays a major role in consumer decision making. Selling
footwear is highly competitive; however, barriers to enter into this industry are quite low.
Therefore, the footwear industry is broad with hundreds of retailers. Switching cost is low for the
consumer, and may occur frequently depending on consumer preference and other factors
affecting consumer buying decision.
Bargaining Power of Buyers - High
There are a large number of buyers relative to the number of firms in this industry. Therefore,
companies like Adidas, and Reebok must continuously market their product and differentiate
their brands against competitors, in order to increase sales and market share. The use of online
tools has helped to enhance the accessibility among users. Brand identity plays a critical role in
the buying behaviour; strong identity will offer consumers trust and loyalty.
Bargaining Power of Suppliers – Low
There are many suppliers in this industry. In essence, there is very little differentiation among
the suppliers which makes suppliers' bargaining power non-existent. Leather, rubber, and cotton
are commodity items and are available abundantly in the market place. Conglomerates such as
Adidas, and Reebok have a definite advantage and power over their suppliers. These suppliers
become dependent on these firms as their means to survival. Additionally, Adidas, and Reebok
have standardised their input procedures pertaining to the materials used, their labour force,
supplies, services, and logistics. Firms are able to switch between suppliers quickly and cheaply,
due to the globalise networks of cheap labour on various continents.
Threats of Substitutes - Low
Buyers' propensity to substitute is low. Consumer substitutes for athletic footwear products are
low because there are little alternatives to switch, some substitutes for athlete footwear could be
boots, sandals, dress shoes or bear feet. Consumers are not likely to substitute due to the
performance specification of the product. For instance, a basketball player would not wear boots
to play basketball. Therefore, there are no real substitutes for athletic footwear.
Rivalry among Existing Competitors - High
The rivalry among existing competitors in the footwear industry is quite high. Large firms such
as Nike, Adidas and Reebok have grown immensely over the last two decades. Their global
reach has expanded through all continents; this is evident using the Internet and e-commerce.
Online selling has enlarged the reach for these firms allowing them to increase sales while
minimising operating costs. Almost every large firm has a web site, and most of these web sites
contain virtual stores which provide convenience to consumers. Most individuals in North
America have access to high speed Internet and online purchasing has become the new trend for
the twenty first century.
Threat of Substitute Products or Services
Rivalry Among Existing Competitors
Threat of New Entrants
Reebok is located in the upper-left portion of the chart, identifying it as employing a cost
leadership strategy. It is concerned with offering affordable shoes to a very broad market.
Adidas is located in the upper-right portion of the chart, identifying it as employing a
differentiation strategy. This company is constantly developing new technology and innovation
in the industry. Examples of this include the new microchips Adidas has developed to
mechanically adjust the shoe's cushioning.
Adidas-Salomon SWOT Analysis (before the merger)
Adidas-Salomon was a leading player in the sports good manufacturing industry. The company
had posted a very steady growth in its sales revenues in recent years, essentially as a result of its
strong brand image. The company had market leading products and strong brand names
including Adidas, Salomon, TaylorMade and others which were further strengthened by its
strong commitment to product innovations. Furthermore, on the supply-chain side the company's
commitment to reduce lead time for manufacturing footwear had enabled the company to avoid
the warehousing of products.
Leading player in the sporting goods industry
The company was amongst the top players in the sporting goods industry due to its strong
brands, market-leading products and commitment to sports for meeting consumer expectations.
The global sportswear market (Euro 45 billion) was dominated by Adidas-Salomon and Nike
and, at a certain distance, Reebok, PUMA and New Balance. Adidas-Salomon's brands include
Adidas, Salomon, TaylorMade and others, which had very strong brand name recognition in
markets served. The company's products served many markets and include footwear, hardware,
apparel, snowboard, golf-related and other products.
Steady increase in sales revenues
Adidas-Salomon's revenues from sales have been steadily increasing as reflected in the last five
years' sales performance ending 2002. From E5.1 billion of sales in 1998 to E6.5 billion in 2002,
the performance has improved by a CAGR of 7%. Though sales declined by 3.9% in 2003 over
2002, it was mainly due to currency translations. The company has been able to achieve this
steady growth in revenues due to its strong brand image, continuous commitment to product
innovation that is consumer focused. Such a steady growth in the company's revenue
performance helped in maintaining a very good image for the company and improved investor
confidence. Additionally, the company reported an outstanding operational and financial
performance in the first half of fiscal 2004. This underlined the company's momentum, with
quarter on quarter sales improvements for all brands, and a record gross margin and earnings
growth of almost 40%, marking the strongest first half year performance in the company's
Successful new product innovations
The company had consistently launched new products and this has enabled it to widen its
portfolio and also enhanced its competitive position. Each company brand targeted a specific
market and new products were introduced based on their requirements. This has helped the
company achieve a greater degree of success. During 2002-2003, the company launched
ClimaCool and a3 in its running shoes category, which were big successes. The company sold
over 500,000 pairs in a3 and over one million in ClimaCool. Furthermore, in the basketball shoes
division, the T-MAC and T-MAC were the bestselling in the US market in 2002 which has led to
the release of T-MAC 4 lace less footwear for 2004. The company's continuous commitment
towards new product innovations not only improved revenues but also helped in strengthening its
relationship with its customers and attracts new customers. In May 2004 the company introduced
what the company described as the first Intelligent Shoe - called "1", the shoe provided
intelligent cushioning by automatically and continuously adjusting itself.
Lead time improvements
The company had considerably improved the lead-time required for footwear manufacturing
through lean manufacturing principles. Earlier in 2000, the company used to take 120 days for
producing footwear; by 2003, this had been reduced to around 60 days. Such a reduction was
made possible as a result of the company's efficient implementation of lean manufacturing
principles which helped in removing non-value-adding procedures and activities, improved
labelling, special handling and other such activities to reduce time taken. These process
improvements have helped the company in avoiding warehousing of its footwear products.
The company had planned and implemented major advertising campaigns during 2004. The
company's immense size and strong position have afforded it the opportunity to undertake global
advertising campaigns with focus on TV, print media and outdoor advertising as well as point of
sale and PR activities. The campaign "Impossible is Nothing", included top athletes from
different disciplines such as Muhammad Ali and his daughter (brand image, boxing and
lifestyle), Haile Gebrselassi (brand image, running), David Beckham (brand image, football) and
Tracy McGrady (brand image, basketball).
The strategy of Adidas-Salomon was lacking focus. This is because it has a very broad product
portfolio, including sport performance products for athletic sports, basketball, golf, tennis,
Nordic disciplines, cycling and fashion oriented products. Rival Puma has demonstrated that
focus can translate into a high profitability.
Over-dependence on Adidas brand segment
While the purchase of Salomon, the French maker of ski and golf gear, steered the company into
the equipment arena, the company generated 79% ($4.9 billion) of its total revenues of E6.3
billion from the Adidas brand segment in 2003, while the other two contributed to the balance.
Despite a strong image for the TaylorMade and Salomon brands, they generated only about 21%
of the total revenues. The company's over-dependence on the Adidas brand segment, which
mainly serves the athletes' requirements, makes the company's overall revenues susceptible to the
market conditions in this segment.
High level of long-term borrowings
Though the company reduced its borrowings by E181 million against 2002, the level of
borrowings was still very high. At the fiscal year end 2003 the company's long-term borrowings
as a percentage of equity were very high at around 146%, which amounted to E1, 574 million.
Such high debt level affected investor confidence in the company and makes low-cost funding of
growth plans difficult. By half year fiscal 2004 strong cash flow had enabled more progress in
debt reduction has been (net borrowings at June 30, 2004 were E967 million, down 39% or E616
million versus E1, 583 billion in the prior year) made but debt remained high.
2003 revenue growth was substantially below the company's first impression from year-end 2002
order backlogs, which were up a strong 14%. As 2003 revenues growth was only 5%, significant
order cancellations in the course of the first half of 2003 are evident. The company achieved
revenues that totalled E6, 267 million ($7,570.4 million), a decrease of 3.9% against the previous
years revenues that totalled E6, 523 million.
Strategic acquisitions and agreements
The company made a few strategic acquisitions during 2004. In September Adidas and Stella
McCartney announced a long-term partnership in New York, presenting the Adidas by Stella
McCartney sport performance collection. For the first time ever a high-end fashion designer had
created a functional sport performance range for women. The first collection was available in
stores across the US, Japan and Europe in spring/summer 2005. It offered products for running,
gym/workout and swimming as well as cover-ups. The Adidas by Stella McCartney range shows
the company's willingness to innovate in the women's sportswear market. Adidas-Salomon
acquired Valley Apparel Company of Cedar Rapids, Iowa in June 2004, a producer and
distributor of collegiate and professional league apparel and accessories. It served small- to mid-
size retailers, such as sporting goods stores, department stores, fan shops and college bookstores.
It has a reputation of producing and delivering large quantities of apparel and branded
accessories within hours of a team's victory. In early 2003, the company acquired the Maxfli
brand of accessories and other golf related products from Dunlop Slazenger Group through its
TaylorMade-Adidas division. This acquisition has helped the company in offering market
leading products in all the golf categories and has improved its global market share to 16% from
less than 1% prior to the acquisition. The company also entered into a strategic agreement in
June 2003 with the INTERSPORT International Corporation (IIC), a multi-sport retailer, in order
to strengthen its sales and distribution network. Specifically, the four year agreement will - in
time - strengthen the company's sport performance, casual, Salomon and other products' sales.
Supply-chain and manufacturing initiatives
The company's success in reducing footwear manufacturing time was likely to continue in the
future also. The company planned to reduce its production time further, which has helped the
company achieve faster delivery of its products to the retailers, thereby reducing inventory costs.
On the supply-chain side, the industry faces a problem due to longer time to market. The total
time taken is about 15 to 18 months of which 12 months are spent in creation of the product,
while the balance of the time in arranging for the raw materials, production and delivery to the
retail stores. The company also planned to implement a new model for its supply chain, which
will considerably reduce the time taken and improve cost efficiency, etc. This initiative helped
the company in serving its customers faster, thereby gaining a competitive edge over its peers.
Sponsoring sporting events
The company's sponsorship of major sports events brought great recognition to its products.
Adidas supplied more than 1.4 million products to federations, volunteers, officials and others
during the 2004 Olympics. Following a successful marketing campaign at the Euro 2004 Soccer
Tournament in Portugal, the company once again expected to achieve new record sales in
football during 2004. During 2002, the company sponsored FIFA World Cup Championship in
Korea and Japan and was acclaimed as the most visible among the brands advertised during the
event and was viewed by 44 billion cumulative spectators during the course of the event.
Furthermore, in the Winter Olympics of 2002, the company sponsored over 50% of the
participating athletes who won about 200 medals. Adidas has a life-time agreement with Kevin
Garnett (most valuable player of the NBA 2003/2004). It also signed a six-year cooperative
agreement with Chinese Football in June 2003. The company sponsored the World Cup in 2006
held in Germany. Sponsorship of these events helps the company in building its Sport Heritage,
Sport Style and other such divisions. For instance, the Sport Heritage division grew into an Euro
900 million businesses and doubled its sales from 2001 to 2003.
Own retail stores
In 2003 Adidas generated 9% of group revenues in own retail outlets. A significant number of
new shops did not positively contribute to earnings because the cost for new shops (of hiring of
sales people and training costs etc.) exceeded early revenues. This will begin to level out going
forward and the company will continue to open own retail shops. Management recently
explained that own retail sell-through was positive in the US in 2003 in contrast to external
customers. The company is therefore planning to open 15 new US shops in the coming two years
and 40 worldwide. Management expects Sport Heritage to grow again from 2004 driven by more
own retail stores and no more cutting of external points of sales.
Adidas operated within a highly competitive market which in many cases overlaps into other
markets as sportswear retailers increasingly compete with fashion retailers. The company's
traditional competitors like Reebok, Nike and Puma made competitive levels intense, but the
addition of casual footwear and apparel manufacturers such as Tommy Hilfiger, adding a
designer edge to the market, had increased competitive levels. Companies had come under
increasing pressure recently from products designed for the value conscious consumer. Adidas
have long been one of the premium brands in sportswear and have charged accordingly, though
this strategy is coming under more pressure as cheaper substitute products are bought by
consumers adding to problems in terms of customer retention.
Foreign exchange fluctuations
The company's manufacturing activities were mostly concentrated in China and other Southeast
Asian countries. Since most of these countries transact in US Dollars, the company incurred
about 70% to 80% of its outsourcing expenditure in US Dollars, whereas, the company's revenue
generation in US dollar and other non-Euro currencies is comparatively lower. Hence, adverse
changes in the exchange rate between US dollar and Euro had a negative impact on its overall
Weak global economy
The GDP of European countries have grown at a negligible rate and are unlikely to improve in
the near future. Similarly, the Latin American markets such as Argentina and Brazil continue to
witness weak economic conditions, while the Southeast and Middle-East regions continue to reel
from political unrest. Thus, the company's revenues were significantly affected due to these
adverse economic conditions.
Impact of scandals in the US and Germany
Accounting scandals across industries in Germany and the US have impacted upon the
company's stock performance. The weak performance of many companies in the sports goods
industry adversely affected the investor confidence in the industry. Thus, external factors can
have an adverse impact on the company's stock price performance and might in turn affect its
Reebok SWOT Analysis (before the merger)
Reebok International was a major player in the sports and fitness products market, with a
particular emphasis on footwear. Its main strengths lied in its size and strong brand awareness.
While footwear is clearly its core product, concerns were being raised over its comparative
disinterest in the associated athletic apparel market, which is over twice the size of the footwear
Growing sales revenue
As part of a strategy to grow quality market share, the company continued to invest in three key
product and marketing platforms: Performance, RBK and Classic. Reebok International was the
second largest manufacturer of athletic shoes in the US, behind Nike. The Reebok brand
continued to drive sales pushing it closer to major competitors, Nike and Adidas. Reebok had
become the number two or number three brand in most of its overseas markets. It held around
10% of the global market, compared to Nike's 34% and Adidas' 15%. The company has been
able to increase revenues and improve operating margins despite some challenging retail
conditions in many key markets around the world in 2004.
Excellent marketing strategy
The company employed a strategy of reinventing its brands in order to gain market share. In
order to enhance its Reebok brand, the company introduced a new street inspired product
collection, RBK, in 2002, followed by an effective marketing strategy which carried into 2003
and 2004. During 2003/2004, the Reebok product offerings generated healthy sell-through
performance at retail. Alongside reinventing brands, the company introduced new marketing
campaigns to promote them. To support the RBK product Reebok created a marketing campaign
entitled Reebok's "Sounds and Rhythm of Sport," which fuses music and entertainment with
sports and performance. The combination of relevant products and a new marketing campaign
improved the performance of the Reebok Brand in the athletic specialty channel of distribution.
Reebok has achieved positive market share comparisons in the critical athletic specialty and
sporting goods channels of distribution (as of October 2004).
Celebrity associated sponsorships
The company expanded its product offerings into more lifestyle and performance categories,
introducing new product segments for both the NBA and NFL, including NBA and NFL
footwear, classic lifestyle apparel and performance gear for off-the-field activities. Reebok
sponsored many top athletes in tennis; Andy Roddick and Venus Williams; as well as music stars
Jay-Z, Pharrell Williams and 50 Cent. Yao Zing's impact in the Asian market is hugely important
to Reebok. Affiliating itself to such globally renowned celebrities enhanced the company name
among many different customer groups.
Strong women's sector
Another one of Reebok's strengths was its success in the women's sector. The market for
women's athletic shoes is larger than that for men, accounting for around 46% and 40% of the
sector's value respectively. In volume terms, the women's sector was even more important, 46%
compared to 35%. Reebok's market share of women's athletic shoe sales was around 35%, and
has been boosted by its 'It's A Woman's World' marketing campaign.
'Classics' under fire
The company had come under fire from its rivals in the classics department. In the past Reebok
has controlled this shoe category without much competition, however companies such as Nike
and Adidas were coming up with their own 'classic shoes'. Reebok were still the market leaders
in that area but the gap kept narrowing.
Low market share in apparels
Reebok controlled only about 1.4% of the apparel market. This posed a problem when squaring
up with its fierce competitor, Nike. The footwear market's growth was slowing. Athletic apparel
gives scope for a larger and more diverse range of products, keeping the market fast moving. The
apparel market was 2.4 times larger than the footwear market. Nike took charge there, with its
innovative designs, and contracts with sports teams and organisations throughout the world.
Danger of stockpiling products by retailers
Futures, or ordered in advance sales, represented around 60-70% of Reebok's business. This has
been valuable to Reebok in the past; however five of the company's brands that represent around
60% global market share could cause problems in the future. Futures growth for these five
brands was around 9.5% on a dollar-weighted basis. This growth was alarmingly fast. Reebok
had to be careful as retailers may be ordering more than they can sell. This could result in a
sudden cut off in orders, leaving the company with large inventories and a decrease in sales.
Increase average shoe price
Reebok's average price per shoe in athletic footwear stores, which account for around 15% of the
market, was considerably lower than average. Its average price per shoe is $45, compared with
an outlet average closer to $60. The company's lower than average shoe price is partly due to the
high percentage of basic products sold, which is itself partly attributable to its traditional position
in the women's sector. This left plenty of space for the company to muscle in on higher priced
sales, as its products and promotional efforts improve. As well as raising brand awareness,
Reebok's sponsorship deals helped the company increase its average sales price.
Draw attention toward new technological developments
Reebok had started developing its product to make it more modern and has invested heavily in
added technology to enhance its shoes. Reebok had a lot to gain from a continued investment in
more technologically advanced, premium products. In 2003, the company introduced new
fashionable and technologically advanced products tied to new integrated marketing programs.
These displayed an enhanced and prominent vector logo which ties back to the Professional
athletes wearing the products on the field. This branding created a real point-of-difference for its
performance products and should help to generate consumer interest at point-of-purchase. These
products are supported at retail with a new performance marketing campaign, which utilises the
athletes and the vector logo in new and creative ways. This campaign included television, print
and in-store marketing packages.
Encourage a strong brand push in Europe
The company planned to enhance its European market, recruiting new management talent and
initiating an aggressive program to regionalise this business utilising a consistent brand image
throughout Europe. Reebok executed unified product, marketing, and sales strategies across all
borders in Europe, thereby presenting the Reebok Brand in a more relevant and consistent
Exploit Nike's lack of high profile sponsorship
Nike, the world's most successful sportswear brand and footwear producer struggled to fill the
void vacated by Michael Jordan. This was the first time in a long time that Nike did not have an
eminent sports star to spearhead their marketing drive. This has left an opening for the likes of
Reebok to exploit, particularly in the basketball arena. The company took the Chinese sensation
from Nike, Yao Ming, hoping to increase market share by 10% to 30% by 2006.
Over reliance on footwear sales
Footwear is Reebok's largest division and the company relies fairly heavily on the footwear
market. That was a competitive field experiencing much slower growth than in previous years
and, like most other producers, Reebok felt that it must do more to increase sales. Reebok had
also to be aware that the market for more expensive footwear was slowing. This could ultimately
force prices down, should this trend continue for a significant period of time. With the company
so reliant on footwear, it risked losses, whereas other competitors such as Nike can fall back on
their apparel division.
Diverted from historical markets
Reebok's original success stemmed from the women's aerobics market in the 1980s. It has since
become apparent that the company has shied away from its roots. Reebok's women's products
represent only 25% of its athletic apparel volume. The women's apparel sector actually accounts
for around 40% of industry sales, which suggests that Reebok risked losing out in the key market
that transformed them into a global company.
Potentially expensive new product marketing
Until recently Reebok had not focused on either the men's or the women's apparel market for
several years. Before it can build up sales significantly in this area, it had to instil confidence
back into consumers that it is good at producing more than just 'classic shoes'. This process
could've proven to be both time consuming and costly.
Adidas-Reebok SWOT Analysis (After the merger)
More products for different customers
Increase in product line
Acclivity in market share
Now both upper and middle priced markets are covered.
Shared R&D, Patents, technology & innovations
Differing values among management
Complexity of joining two corporate cultures
Both companies belong to different countries
Reduction in costs
Cross-over promotion by sponsored athletes
Enter to new market/Segments
Nike's possible acquisition of Puma.
Danger of cannibalisation between the two separate brands.