Adidass new Speedfactory concept features automated production for high-performance quality and unique design

Adidas's new Speedfactory concept features automated production for high-performance quality and unique design

Moves by Nike and Adidas to turbocharge their footwear supply chains through robotics and automated factories are not only set to shake up the athletic wear market but also position it for more full-price selling and reduced input costs, analysts say. And they believe the sector is already on the verge of this tectonic shift.

Nike and Adidas are on parallel missions to turbocharge their supply chains, according to analysts at Morgan Stanley, who forecast that almost 20% of production for the two brands will move to more automated factories by 2023.

Indeed, the trend towards automation has already begun, and should accelerate over the next five years and beyond. Adidas recently opened its first Speedfactory in Germany and is opening a second in Atlanta in the US, while Nike has several automated platforms in development.

And over the next five years, automation and digitalisation could shorten lead times by 66%, down from 12-18 months to just four to six months. Innovations will align inventory management with actual demand – plus consumers will not only be able to choose their own design, but also order customised fitting footwear.

Analysts forecast global athletic wear sales will grow to $355bn by 2021, from $290bn today, and say first mover and scale advantages will help Nike and Adidas beat rivals and take a bigger share of a growing pie.

While production in Speedfactories and other advanced factories will account for just a tiny fraction of the total this year – less than 0.5% at Adidas – growth is likely to accelerate quickly, according to the report 'The Need for Speed Hits Athletic Wear.'

"These plants will likely be proprietary to the brand that produces them, and while it will take the rest of the industry longer to evolve, we expect broader speed initiatives to be supported by third party manufacturing partners.

"This means existing suppliers using traditional manufacturing probably retain 90% of total industry production five years from now. However, beyond five years, the trend should continue with the big brands and rivals likely begin catching up."

The manufacturing evolution will likely cause Asia suppliers to adapt as well. "We don't believe new technology will result in a mass exodus from Asia," the analysts say. In fact, they forecast 4% annual growth for legacy suppliers over the next five years.

"However, we do think newcomers such as Flex [which provides supply chain and other services to equipment manufacturers and teamed up with Nike in 2015] could take market share. Plus, brands could gain negotiating leverage over suppliers in the medium-term.

"The key question is which suppliers position themselves to become brands' strategic partners and which try to position themselves as purely low-cost producers? We think the suppliers who position themselves as strategic partners will be in a better position long-term."

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Two key catalysts

The shift towards supply chain innovation is being driven by two catalysts: Online spending has created a "buy now/wear now" marketplace, and social media is spreading new fashions "at a viral pace."

Research shows 65% of female US shoppers under 35 want stores to offer new styles once per month or more often; roughly 80% of Adidas sales last year were generated by products less than one year old. Investors, too, are asking about the footwear leaders' efforts to address the changing consumer landscape.

As Morgan Stanley Research points out, technology investments into creating faster supply chains will bring footwear brands closer to consumers – and should accelerate athletic wear's market share gains by enabling companies to offer more and better fashion newness to outcompete rival categories for the consumer's discretionary dollar.

Nike has increased capex to 4% of sales (approximately $1.4bn annually) from 2% in FY10, and the analysts estimate Nike has spent $2.5bn on R&D over the last five years. Adidas's investment spend, meanwhile, has compounded at a 17% rate over the same time frame.

Later moving brands may still prosper from strong industry trends, and retailers and suppliers capable of positioning themselves as strategic partners to brands should win, the report says. But companies choosing not to invest along with the big brands or are incapable of offering them a differentiated value proposition are at risk.

Disruption long overdue

The report suggests that disruptive new operating models are long overdue to help the industry solve age-old problems.

Traditional methods of making athletic footwear have not changed much in decades; they are slow and overly complex, outdated and commoditised, and highly labour intensive. "Plus, over the last 40 years they have been refined to the point where meaningful incremental efficiency gains will probably be hard to come by. These methods would be obsolete, except the industry hasn't developed any other standardised process."

On top of this, Asia labour costs have increased at double-digit rates for most of this decade and the long-term outlook is unfavourable. China was the main location for low cost manufacturing for many years, but footwear companies have migrated away to other Asian nations, such as Vietnam and Indonesia.

Traditional footwear making is also vulnerable to volatile commodity costs and foreign exchange fluctuations, as well as a low-double-digit tariff, 11% on average, to import shoes into the US.

The introduction of sophisticated digital tools and automation into the process are set to bring a number of benefits, including:

  • Delivering goods faster to the market;
  • Delivering goods in the right quantities;
  • Producing products at a lower cost; and
  • Creating production techniques that lead to better, more customised product.

"We believe this will create excitement and satisfy an increasing consumer demand, helping the industry take share from other consumer discretionary categories" such as general apparel and footwear, electronics, and restaurants, which all compete for consumers' discretionary dollars.

Supply chain changes

Faster supply chains should deliver a number of other benefits too, including less discounting and lower costs, as well as better inventory management, helping reduce overbuying…and under-buying.

Faster lead times should also help the industry adapt to the "buy now/wear now" retail environment and significantly improve demand forecasting. The rise of the internet has disrupted the traditional retail calendar, and consumers now expect product availability on their terms, not retailers'. Increasing supply chain speed will help the industry adjust to this development.

Also, because it can take 18 months to develop a new shoe, footwear companies have to predict fashion trends far out into the future. This regularly causes mismatches between the inventory that companies invest in and actual consumer demand. Supply chains of the future could cut lead times by 66% or more, the analysts predict.

"We think this helps companies not just cut back on "bad" inventory purchases, but also more importantly, capture sales upside on hot products in season. We think both factors add another 15% to top-line growth."

Capturing upside on hot products in season also means more full-price selling and fewer-discounts – which in turn will drive growth in average selling prices (ASP).

Gains will also come from lower total supply chain costs. The new manufacturing process will require lower raw material, transportation, tariff, and logistics costs – and could reduce the overall cost of a shoe by 10%.

While human labour costs will also decrease, the analysts believe this will be largely offset by investment costs.

Brands the biggest winners

Morgan Stanley believes brands will capture 68% of industry profit growth over the next five years.

While brands, retailers, and suppliers should experience sales growth, better, more customised product delivered faster will drive better ecommerce sales for brands and help them take retailer share.

"We estimate 50% of Nike and Adidas unit growth will happen via their own channels, particularly online."

While "enough" brick & mortar demand will exist to enable premier athletic wear retailers, such as Foot Locker, to continue to thrive, other retailers further down the Nike and Adidas' priority lists "may not do as well in the category."

The report adds: "In the future brands will have a differentiated product offering online and a comparable level of customer service. We think this negates many retailers' value proposition."

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