Excess inventory in key emerging markets, higher labour costs at production hubs, lacklustre new orders from developed markets, under-performing subsidiaries and lost sponsorship contracts. Sounds familiar? These are some of the strategic headwinds facing Nike and adidas in 2013. But, there are gusty tailwinds too. In particular, we are seeing rising global demand for sports-inspired fashion, new trends in fitness and outdoor sports among middle aged consumers, and opportunities for iconic Western brands to tailor their products more effectively to Chinese tastes.
The headwinds are a force to be reckoned with, but how well each company navigates the tailwinds will determine which one comes out on top in terms of growth and profitability over the next five to ten years. Put bluntly, if Nike and adidas – the world’s two biggest sportswear players – fail to harness these tailwinds, they might rue the downward pressures of an unstable global-economy and unforeseen structural changes, but – in the end – they will only have themselves to blame.
Turning silver and grey into gold
Demographics will be key in the developed markets. In Western Europe, for example, the population aged 50 and over is projected to expand by over 24 million between 2012 and 2020, while the rest of the population will contract by more than 8 million, according to data from Euromonitor International. Crucially, there is evidence that the current generation of fifty and sixty somethings is far more active than the generation of their parents (and, in many instances, of their children too). They go to the gym, jog, hike, ride bikes and play golf; and they have time and cash to spend to boot. In much of Western Europe, this is the generation that enjoyed surging real estate equity growth at the same time as building up lucrative pension pots.
Ramping up investment to target (and inspire) the outdoor pursuits of older consumers ought to be high on the strategic agenda of both companies. Neither is doing enough at present to cater to this market, given the future demographic dividend. New orders for Nike products, due for delivery by April, were flat in Western Europe. And while Adidas CEO, Herbert Hainer, has alluded to the opportunity of aging demographics in confidence-building statements to investors, the company is yet to execute any significant scale-up in marketing and innovation initiatives to target older consumers.
Niche markets could be key
Neither company can afford to be complacent about the future. Adidas, for example, has relinquished the contract to provide kit to Team Sky, the world’s leading cycle team (spearheaded by Tour de France winner, Bradley Wiggins). Yet, the UK-based company taking over, Rapha, has a turnover more than 800 times smaller. This might not be as big a deal as losing the NFL American Football League contract (which switched from Reebok to Nike last year), but it is significant first and foremost because Rapha has built up a strong following among wealthy middle-aged cycling enthusiasts. This is the type of niche market Adidas needs to be targeting too, certainly if it wants to maximize the opportunity of an ageing demographic.
Rapha is an upmarket brand, with a formidable growth rate since its establishment eight year ago. If nothing else, the brand shows there is room for premium sportswear in ostensibly cash-strapped markets. Indeed, it is the middle ground – very much occupied by Nike and Adidas – that is most at risk of getting squeezed, especially as the fast fashion juggernaut come ever more aggressively into the sports-inspired apparel category. The challenge in developed markets is in building stronger positions at both economy and premium price points, therefore.
China’s new middle class consumption culture
It is not all plain sailing for the world’s leading sportswear brands in the emerging markets either. Nike has reported two consecutive quarters of declining new orders in China, for example. This is mainly because the company has a big pile of unsold inventory, which is repressing demand for new merchandise. It is not that Chinese consumers have grown tired of Nike, or even that they are feeling markedly less wealthy. It is more that middle class consumption culture has grown more self-confident. As a result, Chinese shoppers are demanding products that better suit their tastes. It is not simply about branding anymore. Nike is keenly aware of this trend, but needs to act quickly to turn things around. Failure to do so will open the door to local players.
The operating environment might look unfavourable for the West’s sportswear heavyweights, but not so. Nike and Adidas – arguably more than most Western apparel brands – have the future in their own hands. Ageing demographics are a reality – it is about how each of these companies leverages them. China’s shift toward a more self-fulfilling and discerning consumption culture is no less certain– and the portfolio mix needs to respond to it. As for sponsorship contracts – they are up for grabs in the same way that sports trophies are up for grabs. It is about being the best team, or in this case, about wielding the best strategy.