The groups gross margin is expected to be 50-100 basis points lower in 2016

The group's gross margin is expected to be 50-100 basis points lower in 2016

German sporting goods giant Adidas Group has warned of a "significant" increase in its underlying sourcing costs over the next five years due to higher labour and material expenses, but believes it can mitigate these headwinds through increased supply chain efficiencies, price rises and cost savings.

Among the moves outlined at an investor event this week, Adidas said it is planning an "aggressive ramp-down" of apparel production in China, leaving its main sourcing platforms in Cambodia, Vietnam and Indonesia. The Philippines, Pakistan and Bangladesh are seen as key second-tier countries, and an increase in regional sourcing is also on the cards, it said.

The company, which sources the vast majority of its products from over 30 countries, said ongoing double-digit increases in labour costs in most emerging markets, coupled with higher material costs for cotton, nylon and EVA, are putting upward pressure on future product costs. Combined with currency effects, it expects gross margins next year will narrow by 50 to 100 basis points. 

To counterbalance this headwind, Adidas said it will continue to work on "further increasing its production efficiencies" by focusing on four levers: product and materials, supply base and allocation, level loading and productivity improvements. 

As most contracts with Asian suppliers are denominated in US dollars, Adidas has established a hedging system on a rolling basis up to 24 months in advance, under which the vast majority of its anticipated seasonal purchasing volume is hedged around six months prior to the start of a season.

As well as supply chain efficiencies, Adidas hopes to compensate for the vast majority of the negative effects with significant price increases in several regions, adjusted trade terms with the company's retail partners, growth in higher-margin markets, and a more favourable category, product and channel mix. 

It will also continue to optimise its overall organisational set-up and focus on initiatives that drive further efficiency gains, and as a result, expects to continue to generate substantial operating overhead leverage next year.

Adidas predicts its operating margin will remain stable next year, helped by a significant reduction of its operating expenses as a percentage of sales.

"We are well-prepared to cope with the cost pressure that the entire industry will be facing next year," noted CFO Robin Stalker.

"On the one hand, our brands and products are enjoying strong momentum. On the other hand, we are optimising our processes throughout the group and along the entire supply chain to drive further efficiency gains and we are continuing our structured hedging approach.

"We therefore have all the levers in our hand that will enable us to stay on our growth path in 2016 – and beyond."

To support its plans to cut labour costs and speed production and flexibility, the company revealed that its first "Speedfactory" in Germany will open next year, using robotic technology to make its first 500 pairs of running shoes.

For in-depth insight into how Adidas plans to realign its supply platforms and tackling the complexity and efficiency of its manufacturing processes in a bid to meet the challenge of rising sourcing costs, click on the following link:

How will rising costs impact Adidas sourcing strategy?