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Strategic and operational opportunities

Favourable macroeconomic developments

Since we are a consumer goods company, consumer confidence and spending can impact our sales development. Therefore, better than initially forecasted macroeconomic developments which support increased discretionary private consumption can have a positive impact on our sales and profitability. In addition, legislative changes, e.g. with regard to the taxation of corporate profits, can positively impact Group profitability.

Growing importance of sports to fight obesity

Governments are increasingly promoting living an active lifestyle to fight obesity and cardiovascular disease. According to the International Obesity Task Force (IOTF), more than 600 million adults were considered obese in 2010. An additional 1.0 billion were estimated to be overweight. Furthermore, up to 200 million school-age children were either obese or overweight. Once considered a problem only in affluent nations, obesity is also becoming an issue in countries with low per capita income. This development has serious health consequences and a dramatic effect on health care expenditures.

As a result, governments and non-governmental organisations are increasing their efforts to promote a healthy lifestyle and encourage sports participation. For example, the US Department of Education awarded US $ 80 million to schools and community-based organisations for use in innovative physical education classes through the Carol M. White Physical Education Program. Given our strong market position, in particular in categories considered suitable for weight loss such as training, running and swimming, we expect to benefit from this trend.

Ongoing fusion of sport and lifestyle

The border between pure athletics and lifestyle continues to blur as sport becomes a more integral part in the lives of more and more consumers. People want to be fashionable when engaging in sporting activities without compromising on quality or the latest technological advances. At the same time, performance features and styles are finding their way into products meant for more leisure-oriented use. We estimate the global sports lifestyle market to be at least three times larger than the performance market. This development opens up additional opportunities for our Group and our brands – which already enjoy strong positions in this market. One example of this is our plan to expand the adidas NEO label as part of our Route 2015 strategic business plan see Global Brands Strategy.

Emerging markets as long-term growth drivers

According to estimates by the United Nations, the global population is projected to grow from currently 6.9 billion to 7.3 billion by the end of 2015 and is estimated to exceed 9 billion by 2050. A large portion of this growth is being driven by emerging economies. Rising employment rates and real incomes as well as a growing middle class are fuelling these economies – and subsequently our industry. Sports participation in countries such as China or India has historically been lower than in industrialised countries. We expect sports participation rates to increase over time with increasing leisure time, investment in infrastructure and the broadening of awareness of the benefits of physical activity. In addition, European and North American sporting goods brands are often seen as highly desirable, easily accessible, affordable luxury goods in emerging markets, which presents an additional growth opportunity.

Women’s segment offers long-term potential

In our opinion, the women’s sports market is one of the most attractive segments in the sporting goods industry, with women accounting for more than a third of total spending on athletic footwear. Our Group still generates the majority of its revenues in men’s and unisex categories. The adidas Group will continue to invest in developing women-specific product offerings in both performance and lifestyle that emphasise female individuality, authenticity and style. Examples today include the adidas Women’s Techfit apparel collection, which was developed in collaboration with the Berlin State Ballet, toning footwear and apparel at Reebok, and a specifically designed series of Burner drivers and irons at TaylorMade for women.

Increasing consumer demand for functional apparel

Consumer demand for functional apparel has increased significantly in recent years as consumers realise the benefits of functional apparel over traditional cotton sportswear. Improved moisture management, superior ease of motion and increased comfort are all factors encouraging consumers to switch to high-performance apparel.

The design and development of functional apparel requires significantly more expertise, product and material research as well as production know-how compared to low-tech apparel. Therefore, only a few companies are able to supply high-end functional apparel. Our resources and our positioning as a sports performance leader enable us to constantly develop innovative products and capitalise on them. In 2010, for example, adidas launched the Terrex Softshell Jacket. Engineered for high-performance comfort on the trail, it combines breathable wind protection with specific fit characteristics that move with the consumer.

Growing popularity of “green” products

Today’s consumers are increasingly aware of the impact their consumption has on the environment. Therefore, they demand more and more products that are environmentally benign. In 2010, the adidas Group continued its efforts to create meaningful product platforms to drive growth in this area. In particular, we focused on the extension of the adidas ”Better Place” programme, for which the first products were introduced globally in 2009. Products and packaging in the programme are designed taking sustainability principles into account, such as broadening the use of recycled materials and monitoring energy use in material and product preparation.

With all adidas Sport Performance categories participating in the programme, the adidas Group is moving forward with ambitious plans in the build-up to the London 2012 Olympic Games see Sustainability. It is our target that 100% of adidas Sport Performance athletic footwear products and 20% of apparel products will have some sustainable content by 2012. Reebok has also been steadily introducing eco-friendly products. In January 2010, Reebok launched the Kids’ Green Easy Collection of toddler and infant footwear. The Kids’ Green Easy collection addresses environmental concerns by utilising recycled raw materials. Our efforts to use environmentally friendly materials in our products are of course not exclusive to these specific programmes and are also used in other categories, albeit to a lesser extent.

Social media offering new ways of consumer engagement

Advances in digital communication offer significant opportunities for our brands to engage with consumers more frequently and enhance our opportunity to build long-lasting relationships and brand loyalty. The adidas Group constantly monitors latest developments and trends in communication technologies. The emergence of social media and social networks is one such example which is already helping our brands increase their consumer reach. A key advantage of these tools is that they allow our brands to engage in a direct dialogue with our consumers. For example, by offering consumers the opportunity to actively participate in brand campaigns or in the design and creation of new products, we can generate a far superior brand experience which resonates in particular with the young generation. In this regard, most of our divisions are investing considerable resources to present the adidas Group’s brands within different social media platforms, such as Facebook or Twitter. For example, the adidas Originals Facebook page has attracted more than 7 million followers.

Strong market positions worldwide

The adidas Group is the market leader in numerous countries around the world. This strong competitive position offers us many advantages in terms of global brand visibility, market power and the ability to effectively expand our position in emerging markets. As a result of our strong partnership portfolio and marketing efforts, consumers around the globe are highly aware of our brands and are receptive to our brand messaging. This makes demand for our products more stable compared to smaller competitors. Hence, many retailers consider our products as core to their offering. The adidas Group can therefore compete more effectively for shelf space.

Multi-brand approach

We believe there is a natural limit to the audience size a single brand can appeal to, given the diverse tastes and expectations of a highly fragmented consumer market. Our multi-brand approach provides us with the opportunity to leverage the power of our brands in a more precise and meaningful way see Group Strategy. We are able to utilise the combined strengths of each brand to compete for a higher percentage of the total market – covering a greater number of demographics, consumer needs and price points.

Personalisation and customisation replacing mass wear

Today’s consumers are looking for choice and variety that go beyond choosing from a wide selection of products. We engage in developing unique and relevant products that fit specific functional and aesthetic requirements see Group Strategy. For example, the adidas, Reebok and TaylorMade brands all offer different personalisation and customisation platforms reflecting each brand’s strategy. Key concepts at adidas include mi adidas, miTeam and miCoach. For example, miCoach is a personalisation concept that combines product technologies with an intelligent web platform. It offers the consumer a personal and real-time audible training system. In August 2010, adidas introduced the miCoach app which allows smart phone users to turn their phone into a personal coach. With “Your Reebok”, consumers can design and order completely customised footwear online. At TaylorMade-adidas Golf, the myTPball online platform offers customers the opportunity to create and order their own golf balls, and our Centers of Excellence provide customised fitting sessions for golfers with expert fitters and technicians. We expect the market for personalised and customised footwear, apparel and hardware to grow strongly and evolve further in the coming years and we will therefore continue to invest in the space.

Exploiting potential of new and fast-growing sports categories

Exploiting the potential of emerging, fast-growing sports categories is another opportunity for our brands. Our brand teams conduct market research and engage in trend marketing to detect changes in lifestyle and consumer needs of their target audience as early as possible. Changes in lifestyle, habits and attitudes can potentially result in the emergence of new consumer needs that are not addressed by current market product offerings. For example, muscle toning has evolved into a meaningful category in less than two years. Having launched the Reebok EasyTone in 2009 as a walking shoe, the Reebok brand has successfully introduced additional styles and has extended the toning platform to other sports categories as well as to apparel. Similarly, a growing trend is the move by athletes and sports enthusiasts towards more minimalistic products that promote natural body movement. The demand for sports equipment that promotes natural body movement is seen as potentially a major future trend. In order to tap into this opportunity, we are expanding our efforts to bring to market more lightweight and flexible products that support the athlete’s natural course of motion.

Expanding distribution scope

The sporting goods retail environment is changing constantly. People increasingly want to get involved with our brands. We therefore continue to adapt our distribution strategy to cater for this change and have made controlled space initiatives a strategic priority. This includes retail space management with key retail partners as well as the introduction of new own-retail store formats. For example in November 2010, the Reebok Reetone World opened its doors in Munich. In close cooperation with major retailers, Reebok offers alongside the popular toning shoe some exclusive pieces of the “On the Move” collection. Customers can also design and personalise their own Reebok shoes at the YourReebok station. In addition, in the run-up to the 2010/11 basketball season, adidas launched exclusive NBA shop-in-shops within several hundred Champs Sports locations throughout the USA. Through initiatives like these, we believe we will be able to more effectively target consumers and involve them emotionally with our products.

Cost optimisation drives profitability improvements

Continued optimisation of key business processes and strict cost control are vital to achieving high profitability and return on invested capital. We are confident that there is still significant opportunity to further streamline cost structures throughout our Group. For example, we believe we will be able to realise medium-term economies of scale as we look for possibilities to further integrate adidas and Reebok functions. In addition, we continue searching for ways to increase efficiency in our supply chain and make it truly demand-driven. Furthermore, by implementing end-to-end planning processes and improving our replenishment capabilities, we see opportunities to not only better serve our customers but also to reduce our operating working capital needs see Global Operations. Another example in this respect is the reduction of the number of articles; this reduces workload in the creation area and warehouse costs, and allows us to offer more focused ranges to our retail partners.