Adidas market position and financial history
The revenue of Adidas in 2009 was £ 10.4 billion, 31.5% of revenue was from Western Europe, 22.8% was contributed by North America, 9.7% in Latin America and 9.3% is from Greater China (Datamonitor, 2010). Adidas is competing with Nike and PUMA in all sports goods fields (Fenn, 2009). Nike is the first largest sports goods company in the world with $ 19.2 billion revenue in 2009 (equal to £ 13.6 billion) (Nikebiz). Another competitor is PUMA, which is the third sports goods company locates in Germany as well, with £ 2.5 billion revenue in 2009 (PUMA, 2009). In 2010, Adidas claimed a plan to pass over Nike in 2015 with increasing 50% of sales to £ 17 billion (Euromonitor International (a), 2010). Becoming official sponsor of FIFA world cup is positive for taking market share and achieving this target (Euromonitor International (b), 2010). To enhance competitiveness, Adidas built fashion division to enter mid-price fashion market. Under this situation, Adidas cooperates with famous fashion designers, and creates SLVR and Adidas-neo as new fashion brands (Euromonitor International (a), 2010).
Reviewing financial statement of Adidas in last 5 years (Appendix 1), the revenue of the company developed with small wave most time except 2006 (Fenn, 2009). The revenue of company kept on increasing from 2006 to 2008, but a tight fall happened in 2009 (Appendix 1). Analysing gross profit will help to reduce the misleading of revenue data. The gross profit (Appendix 3) increased sharply between 2005 and 2006, and then developed steady and fast until a decrease occurred in 2009. Meanwhile, gross profit margin (Appendix 3) declined sharply from 48.2% to 44.6% in 2006, after a dramatic increase to 48.7% between 2007 and 2008, another fall came up in 2009 to 45.4%. Operating profit margin of Adidas (Appendix 4) states the same trend as the gross profit margin. Comparing with financial statements of Nike and PUMA (Appendix 2), similar situation is also existed.
Adidas explained that financial crisis had negative effects on performance of company in annual report of 2009 because consumer confidence and employment were hit. The Chart 1shows that the UK consumer confidence touched the bottom in 2008, and Chart 2 shows UK unemployment rate increased at the same time. Sports goods industry was influenced by this crisis as well, and as Appendix 2 & 5 shows, Adidas, Nike and PUMA were all affected. Another negative factor is the currency exchange rate is not stable, especially during financial crisis period. Adidas had 95% of production was outsourced to Asian in 2009, and, as Table 1 shows, wave of exchange rate may made loss on some level (Adidas).
Euro exchange (31/12/2007)
China Yuan Renminbi 10.66504 0.093764
India Rupees 57.48195 0.017397
Euro exchange (31/12/2008) Units per EUR EUR per Unit
China Yuan Renminbi 9.499312 0.105271
India Rupees 67.62561 0.014787
Euro exchange (31/12/2009)
China Yuan Renminbi 9.78839 0.102162
India Rupees 66.5318 0.01503
Chart 2 United Kingdom unemployment rate
(Housing & Neighbourhood Monitor, nd)
In 2010, world economy started to recover, as Chart 3 showed that economy might return to normal level in 2010, therefore, Adidas maybe have a better performance in this year.
3. Assessment of the financial performance of Adidas
Assessing the financial performance of Adidas, some relevant key ratios should be stated, including Return On Capital Employed (ROCE), Return On Shareholder Fund (ROSF), which belong to profitability, Average Inventories Turnover Period, Sales Revenue Per Employee, which belong to efficiency. Current Ratio belongs to liquidity and which helps to analyse profitability and efficiency in this part.
According to Peter Atrill and Eddie McLaney (2008), ROCE is a primary ratio which assesses the relationship between operating profit in a period and average long term capital investment in the business. For this reason, high percentage of ROCE means good profitability and efficiency. The ROCE of competitors should be compared because of features of this industry. With average 15.6% ROCE of Adidas in five years, this figure is lower than 27.8% of Nike and 30.6% of PUMA. Particularly in 2009, Adidas had the worst performance in these three companies although Adidas improved this ratio until 2008 (Appendix 6). Under this situation, the improvement of ROCE is needed for Adidas in the future.
As a listed company, ROSF (Appendix 8) is another factor could be examined which describe the dividend for investors. The figure of ROSF for Adidas declined in 2009, but Adidas still paid £73 million for shareholders. Additionally, Dividend per share of Adidas was 0.35 in 2009, better than 0.16 of Nike, still attractive for investors.
Average inventories turnover period is important for sports goods company because the company need to ensure they have suitable amount of inventory for recall the demand of market. The Average inventories turnover period in days (Appendix 9) for Adidas is 111.87 days in average, which is longer than Nike's 85.08days and PUMA's 109.35 days between 2005 and 2009. As a result of the comparison, Adidas has considerable performance in this field and improvement is necessary. Furthermore, inventory is relevant with the ability to pay current liabilities and tie up capital because it is hard to exchange to cash immediately sometimes. Account for this problem, acid test of current ratio is necessary. The figure of acid test (Appendix 10) shows that Adidas still has capacity to pay back borrowing on time although it has big amount of inventory.
Sales revenue per employee (Appendix 12) is another important ratio which describes the productivity and efficiency of the company. This ratio is also having relationship with cost of sale, therefore, higher Sales revenue per employee means lower cost for manufacturing industry. It is still important although Adidas, Nike and PUMA outsourcing their production to other companies. Comparing with Nike's 395486.10 per employee, Adidas has lower data because new employees were recruited for its own retail shops, and the number of employee increased from 26376 in 2006 to 39596 in 2009. On the other hand, between 2006 and 2008, operating profit (Appendix 4) of Adidas increased steady with the growing number of employees, therefore, Adidas could do better on Sales revenue per employee in the future.
Profitability and efficiency of Adidas explained some reasons that the company can become second largest sports goods provider on the world. However, to replace Nike, more improvement is still necessary.
4. Key Performance Indicators and value driver at Adidas
Key Performance Indicators (KPIs) are used for assessing and helping on improvement of business performance. Regarding to annual report of Adidas, key performance indicators include operating profit margin, average inventories turnover, and employee assessment.
Operating profit margin is the most important indicator for Adidas because it assesses the ability of operating expense management, highly associate with efficiency. Through analysing operating profit margin (Appendix 4 & 5), Adidas could through controlling operating expenses to improve efficiency. Average inventories turnover period (Appendix 9 & 10) can help Adidas measuring the days of average inventory is sold, and whether recall the demand of market. This ratio is related to efficiency of a business and the amount of capital tie up. Therefore, Adidas might improve this ratio to gain better efficiency. Assessing employee is not only a KPI but also a value driver for Adidas. As mentioned above, sales revenue per employee (Appendix 12) is important and Adidas may capture more benefit through this part. Therefore, Adidas takes care on employees' satisfaction and encourage them to work efficiency.
A most important value driver for Adidas is brand appeal and its market positioning. Adidas is official sponsor of FIFA world cup 2010 in South Africa and sponsored 12 teams who played 38 matches. Around 2.7 billion audiences watched the game which means Adidas may gain a good advertisement effect (Euromonitor International (b), 2010). At the same time, besides keep on advantage in sports goods industry, with its brand appeal, Adidas built fashion division to launch new fashion brands SLVR and Adidas-neo which is for 12-19 year old consumers to enter new market. In addition, cooperating with international known fashion designers, Adidas maybe makes this new plan successful (Euromonitor International (a), 2010).
As the second largest sports goods provider, Adidas has ambition to take more market share. The financial history and assessment of Adidas are good, but comparing with Nike, Adidas still needs some improvement on profitability and efficiency such as ROCE, average inventories turnover period and sales revenue per employee. Adidas has fall in several financial field is 2009 because of economic recession. However, with trying to improve KPIs and the value driver, Adidas may be recovered soon.
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