“We have made a lot of progress in our strategy, but at the same time, we have a very long way to go."

“We have made a lot of progress in our strategy, but at the same time, we have a very long way to go."

North America has been the biggest challenge for Adidas historically, but it will likely also be the biggest opportunity for it going forward, the German sportswear giant has told investors as the company upped its sales target for the region by almost half by 2020.

Outlining how Adidas intends to drive further progress in its 2020 business plan, new CEO Kasper Rorsted told attendees at its 2017 investor day yesterday (14 March) that four elements - portfolio, North America, scaling One Adidas and digital – will be key to strongly accelerating sales and earnings growth.

"We have made a lot of progress in our strategy over the last 18 months or so, but at the same time, we have a very long way to go."

North American challenge

Adidas has struggled in North America as recently as 2014 but has since seen an upswing, thanks to a consumer shift to casual, white sneakers and denim.

The region represents around 40% of the global sportswear market. But while Adidas and its largest rival Nike have roughly equivalent global sales, in North America Adidas trails. It recorded sales of US$3.6bn in 2016, in comparison to Nike's $14.7bn.

Rorsted told investors yesterday that the fashion-driven Originals business had grown 80% in North America last year, Adidas running sales had climbed 40%, while sales of US sports rose 25%.

Yet, the CEO said that despite the work in North America over the last few years, the company was "very unhappy" with where it is currently.

"We are the fastest growing brand in the US and there are many things we did right in the last two years, but we always need to understand what is the starting position in the US. The starting position is, for 10-15 years we did not make sustainable progress in the US. We had good years, we had bad years, and we had inconsistent years. We were unclear where we wanted to take the company. That changed around two and a half years ago."

Consequently, Adidas has implemented its first geographic 2020 target: to increase North American sales by 47% by 2020 to EUR5bn, following a 24% jump to EUR3.4bn in 2016.

Indeed, Rorsted told investors to expect "more relative improvement than you'll see in the rest of the years" in the region.

"We are not in a short term race here, we are in a long term race."

"We are not in a short term race here, we are in a long term race. We need to make sure we build the right position in the US that will allow us to be globally competitive long-term."

The focus, he said, will be on product franchise management, ie ensuring it has the right presence in key cities, ensuring the company is positioned correctly with key wholesale partners, elevating its direct-to-consumer experience, and building a digital and omni-channel ecosystem.

Digital execution

But it is digital, Rorsted said, that will be the game changer in the industry, as he outlined Adidas' ambitions in this area.

"The world has completely changed. This is a very attractive path for us. If we don't get this right, we will not be successful long-term as a company. The best way to accelerate is building direct relationships [with the customer] through digital. Digital is the vehicle to engage the way we communicate with our consumers."

The three elements of focus will be to look at digital from a brand commerce standpoint, from a mobile communications standpoint, and from a creation standpoint.

Rorsted pointed to the purchase of Runtastic in 2015, which he said has been "a tremendous asset" for Adidas.

Bought for US$238m, the acquisition gave Adidas a major boost in its fitness technology efforts, giving it access to the company's 100m-plus user base. Since buying the app, Adidas has been focused on making Runtastic a bigger part of its digital business strategy. It is now looking to work with third parties to create more personalised experiences.

"Execution is key in the digital space. It's not just about leveraging expertise in technology, it's about understanding culture. The value of Runtastic is not its integration into Adidas, it is about understanding this, leveraging expertise in technology, and converting the user base.

"We are a consumer driven organisation and that drives the way we think about digital."

"We are a consumer driven organisation and that drives the way we think about digital. We need to make sure that in order to win with the consumer we are in a premium position with them. Everything is mobile, everything we think about, every time we create anything where there is a product description, a video, it always starts with a mobile. And it has to be personalised. So we completely drive the consumer obsession into everything we do, whatever we do with the consumer. We believe that creates huge opportunity for us."

Speed to market

The company also plans to build on its existing digital technologies such as 3D creation, 3D printing and smart manufacturing methods, as in its Speedfactory. Adidas currently has one in Germany, and is opening another in Atlanta imminently.

Brand chief, Eric Liedtke, told investors the key is giving customers what they want, where they want it, and when they want it.

"Our model is the same as it was in 1962 when it was invented. The model is based on a six-month outlook. You take an order six months before you deliver it to the retailer. What world are we living in that anyone is waiting six months for anything?"

Adidas has, therefore, set itself on a journey "to disrupt our industry for evermore", which will see the company recreate how product is procured and delivered in a timely fashion.

"There are four benefits. If we can give the consumer what they want, when they want it and where they want it, we decrease risk," Liedtke told investors. "Right now, with the futures game, you're guessing what might be popular, and you're trusting your wholesale buyer to guess with you. By changing this, we increase our brand advocacy, our sales go up and of course, we have less discounts and cancellations. And we have much more full price sale. That is the strategy behind speed. It's not fast fashion, it's about giving the consumer what they want, it's about reading and reacting."

This will be done, Liedtke said, in three ways: through in-season creation – delivering in the shortest time possible based on the digital technology Adidas is pushing; through never being out of stock; and via planned responsiveness. This means giving suppliers the information and technology they need to be able to respond.

Raising the bar

Shares in Adidas soared last week after the company increased sales and profit forecasts, targeting total sales of EUR25bn to EUR27bn by 2020, as it highlighted an "exceptional" 2016.

The group narrowed its net loss by 77.7% to EUR10m (US$10.6m) in the fourth quarter, increased gross margin 1.6 percentage points to 48.8%, and grew group revenues by 12.5% to EUR4.7bn.

Adidas raises sales and earnings targets to 2020

Adidas concedes it faces significant challenges, namely slower growth than the industry, not winning enough young consumers, and margins and operating profit below that of its main competitors.

Rorsted is confident there is growth ahead, but he warns of the infrastructure that still needs to be built in order for people to migrate to the Adidas brand.

"It will not be a completely smooth ride from here to 2020. We will have bumps in the road, some quarters won't be the way we would like them to be but we believe we can take the company from a EUR19bn organisation to an approximately EUR25bn to EUR27bn organisation. So it's a huge step in the right direction and it should enable us to create a very attractive return to all of the owners of the company."