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Lululemon

1. 1. Strategic Analysis of Lululemon Prepared by: ShahnamTaheri May: 2011 1­The resource­basedmodel assumes that each organization is a collection of resources and capabilities, which providethe basis for a firm’s strategy and its primary sources of above­ average returns. Use this model tooutline Lululemon’score competencies and how their capabilities will need to evolve to sustainabove­average return. 2­Strategic competitiveness results when the firm is able to satisfy a groupof customer by using competitive advantages in a given market. Describe Lululemon’s relationshipwith its customers and how their business level strategy demands they continuously meet andexceed client expectation (factor client insight, richness and affiliation dimensions in yourresponse) “Reach is the degree to which a firm can manage its value chain activities to connect itscustomers to an accessible product/service offering” (Wells and Gobeli, 2003). In other words, it isnot only the ability of customers to reach the firm but also the firm‟s ability to reach the customerwith its products and services. For example, the music industry has traditionally marketed, sold anddistributed it product offering while ignoring the digital transmission element. The second issue isaffiliation. Affiliation is a product of Internet culture and the greater transparency of e‐commerce.For example, book publishers have long promoted particular books in bookshops and no‐one hasraised a murmur.

2. 2. The third issue is richness. “Richness is the degree to which a firm can facilitate the exchange ofinformation to deliver products/services that match customers‟ exact wants and needs” (Wells andGobeli, 2003). For example, the interaction between a local tailoring shop and its customers isextremely rich as they can easily observe preferences and produce a customised productaccordingly. The challenge is to identify the attributes conducive to the digital medium and leverthem effectively. 3­ What can Lululemon do to defend its leadership position in this market andretain its dominant player status? What threats do competitors like Lotus wear,GAP,etc pose forLululemon? Becoming More Global Becoming More Innovative Becoming More Customer­Focused Investing in High­Growth Opportunities Improving Operating Efficiency Greaterunderstanding of local laws and business arrangements in strategy making Greater interdependenceamong leaders to create more effective collaboration across functions in bringing new products to

↓ Supplier Power (low) → Rivalry Among Existing Competitors (high) ← Buyer Power (high) ↑ (low) Threat of New Entrants Ree...

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market3. 3. Need to increase leadership involvement across functions in gathering consumer insights and

translating these into profitable ideas for new products Must anticipate capital, space, talentimplications of rapidly expanding product portfolio Need cultural change to create a spirit ofinnovation versus a culture of risk aversion at top levels of the organization Need to develop andimplement new processes for understanding customer experiences and translating them intoimproved business practices Must create solid linkages across the organization at all customertouch points, so that the customer experiences a seamless relationship Need to understand theneeds of different customer segments and move beyond “one size fits all” approach Must instill aculture of customer primacy and customer care Rapid growth requires attention to talentdevelopment; must accelerate the acquisition and development of talent for key roles to avoidtalent becoming the constraint to continued growth Must grow number of leaders at every level by10% per year over next three years Must introduce Six­Sigma, lean manufacturing and other

4. 4. methods to bring costs into line with key competitors; these must be led from the top andsupported by leaders at every level Must create a culture of continuous improvement that is ledINTRODUCTION OF LULULEMON lululemonathletica Inc. (Lululemon), a yoga­inspiredathletic apparel and accessories manufacturer and retailer, was founded in 1998 in Vancouver,Canada. In 2007, thecompany owned or franchised 81 stores internationally. Lululemon‟s missionwas “to create components for people to live longer, healthier, and more fun lives”, based on corevalues of quality, product, integrity, balance, entrepreneurship, greatness, and fun. Lululemonproduced high­quality, innovative products meant to inspire physical activity in yogis and athletes.The company created a manifesto to capture the essence of the Lululemon culture and inspirecustomers to consider changes to improve their own lifestyle. The manifesto can be found inAppendix 2. Ideas like “a daily hit of athletic­induced endorphins gives you the power to makebetter decisions, helps you be at peace with yourself, and offsets stress”; “that which matters themost should never give way to that which matters the least”; and “successful people replace thewords “wish”, “should” and “try” with “I will”” were part of the manifesto and part of theLululemon brand religion.

5. 5. The company targeted “Super Girls”; the daughters of the 1980s “Power Women”. Theseeducated, hard­working women lived healthy lifestyles by working out, eating right and taking careof themselves. Lululemon opened lines of men‟s clothing and accessories, but still remainedhighly dedicated to its core market of “Super Girls”. Lululemon‟s founder, Dennis “Chip” Wilson,1­"Who is Lululemon Athletica?." Lululemon Athletica. Lululemon Athletica, Inc., Web. 4 Feb2010. <http://lululemon.com/about/>. 2 "Lululemon Athletica, Inc. ­ Annual Report."www.shareholder.com. 23 Feb 2008. Shareholder.com a Nasdaq OMX Company. 13 Mar 2009<http://investor.lululemon.com/secfiling.cfm?filingID=909567­ 08­415>. 3 "Lululemon AthleticaMedia Kit."Lululemon Athletica Media Site. Oct 2009. Lululemon Athletica, Web. 4 Feb 2010.<http://lululemon.com/media/press_kit/lulu_media_kit.pdf>. 4 "Lululemon Manifesto". LululemonAthletica, Inc. June 22, 2008 <http://www.lululemon.com/culture/manifesto/text>. 5 Suppa, Julia."The Lululemon Love Affair".Digital Journal. June 16, 2008

6. 6. <http://www.digitaljournal.com/article/78230/The_Lululemon_Love_Affair>. 6 Wilson, Chip."Lululemon Blog." How Lululemon Came Into Being. 30 Mar 2009. Lululemon Athletica, Inc.,Web. 4 Feb 2010. <http://www.lululemon.com/community/blog/how­lululemon­came­into­ being­a­grossgeneralization/>. oikos Global Case Writing Competition 2010 2 Lululemon designed andproduced “technical athletic apparel for yoga, running, and dancing.” The company initiallybecame popular for its well­fitting black workout pants. In addition to workout pants, the companysold workout bras and tanks, shorts, capri pants, tshirts, sweatshirts, jackets and other pieces ofapparel for men and women. The company also produced a line of accessories including waterbottles, head gear, yoga mats and accessories, and yoga and gym bags. Lululemon took pride inusing innovative materials to manufacture its products. The company‟s most well­known and

in the industry. Examples of this include the new microchips Adidas has developed to mechanically adjust the shoe's cushio...

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often­used fabric was Luon®, a moisture wicking fabric that was used for most of its pants, shorts,tanks, and bras. A more innovative fabric the company used was Silverescent®, a fabric made withsilver yarn, designed to eliminate bacteria and remove odor from the fabric. The average price for apair of Lululemon pants was $99USD, bra was $48USD, tank was $52USD, and jacket was $98.Lululemon‟s line of accessories ranged from water bottles sold for $25 to bags as expensive as$88.10 Lululemon declared “Social Responsibility is our DNA” on its corporate website. Thecompany felt responsible to all stakeholders: employees, customers,

7. 7. vendors, suppliers, stockholders, and the environment. Lululemon further supported itscommitment to social responsibility on its website: “It is who we are and what we do and we willcontinue to further our mission of „creating components for people to live longer, healthier andmore fun lives‟....both for our guests, our employees, and our manufacturing partners.” 2007proved to be a financially stellar year for Lululemon. Total Assets had more than doubled, from$48,492,745 in the beginning of 2007 to $97,906,418 by the end of the 2007 fiscal year. NetRevenue had increased during the same time period by 45.8%, while Net Income posted a 75.1%increase. A Financial Analysis for the company can be viewed in Appendix 3. The companycontinued an aggressive expansion strategy, focuse LULULEMON‟S PLAN FORSUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY From its inception,Lululemon had extensive plans for incorporating sustainability into the overall strategy of theorganization. Corporate Social Responsibility was at the heart of Lululemon. The company namedits Corporate Social Responsibility strategy “Community Legacy”, and Lululemon‟s businessprocesses were centered on the five elements described in the Community Legacy initiative:community, people, sourcing and manufacturing, efficiency and waste reduction, and greenbuilding and spaces. 14 Lululemon specifically focused on three elements of the CommunityLegacy initiative as it related to sustainability: sourcing and manufacturing, efficiency and wastereduction, and green building and spaces. Sourcing and Manufacturing was developed around athree year strategy aimed at

8. 8. working with suppliers that not only shared Lululemon‟s vision and values, but that compliedwithLululemon‟s Workplace Code of Conduct, developed internally by Lululemon executives.Lululemon was committed to only work with suppliers that were as concerned about theenvironment and human health as Lululemon. The company set a high level of expectations;therefore, suppliers that wanted to work with Lululemon had to meet specific requirements, andwere continuously audited by Lululemon to identify areas of weakness and opportunity. Lululemoncreated a Social Responsibility Compliance ranking to assess suppliers and manufacturingpartners, and evaluated each partner out of a possible score of 100. The scorecard was brokendown into four sections: labor practices, environmental responsibility, and health andsafety.Efficiency and Waste Reduction was also at the core of Lululemon‟s Community Legacyinitiative and overall strategy. The five year vision for this plan included a high level of productand process innovation to reduce environmental pollutants in garment manufacturing and retailing.The company worked on implementing an internal environmental guide and clause in theWorkplace Code of Conduct for compliance by both Lululemon and its suppliers. In addition toconstant innovation of design, packaging and shipping processes were constantly scrutinized inorder to find the best possible way to decrease the company‟s environmental impact. Lululemonalso implemented measurement tactics and benchmarks as indicators of the company‟senvironmental footprint, and to identify areas where improvements could be made. Finally,Lululemon set up networks between itself and environmental experts and NGOs to facilitate ideasharing about process and product improvements, and to foster ongoing conversations aboutcorporate socia Green Buildings and Spaces was the final component of Lululemon‟s CommunityLegacy initiative. The company had a five year vision for LEED (Leadership in Energy and

9. 9. Environmental Design) designed buildings and spaces for new construction, and motivatedexisting departments and retail locations to aim for zero waste and emissions through the

market and new products were introduced based on their requirements. This has helped the company achieve a greater degree ...

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implementation of an internal building guide and the Building Code of Conduct; which encouragedpaperless communication along with recycling and paper reduction programs, natural building andmaintenance materials sourcing, and existing facility retrofitting for improved energy efficiency.Lululemon set a corporate goal of 95% zero waste efficiency in operations by 2010.4 INDUSTYANALYSIS The main industry in which Lululemon competed was NAICS INDUSTYANALYSIS The main industry in which Lululemon competed was NAICS 315999 ­ OtherApparel Accessories and Other Apparel Manufacturing. The industry elasticity, an indication ofprice sensitivity within the industry, for 2007 was 3.8%, a 0.4% decrease from 2002, whereasLululemon‟s own price elasticity in 2007 was 18.2%. 16 This observation proved that consumersof these apparel products had become more sensitive to price adjustments, but buyers ofLululemon products were not sensitive to price adjustments at all. Although the industry wasextremely competitive, the demand for the Lululemon products was less sensitive to priceincreases than the rest of the industry. Perhaps the largest barrier to entry in this industry was theexistence of dominant brand names such as Nike and Under Armour; however, Lululemoncontinued to increase its market share, seemingly quarter by quarter. Lululemon experiencedhigher gross margin at 51.7%; as compared to the industry‟s 37.7%;

10. 10. quarterly revenue growth at 34.1% versus the industry‟s 7.3%; and a price/earnings ratio of10.3 as compared to the industry‟s 8.1,13 indicating that Lululemon was valued higher than theindustry in which it competed. These numbers excited investors and analysts alike, and as a result,Lululemon became one of NASDAQ‟s star performers in 2007. SMARTFIBER AG, SEACELL®,AND VITASEA I­ CORE COMPETENCIES & COMPETITVE ADVANTAGE Competitiveadvantage is a special edge that allows an organisation to deal with market and environmentalforces better than its competitors. Whereas, sustainable competitive advantage is one that isdifficult for competitors to imitate. This distinction is essential when evaluating the acquisition andits effects. A merger of this scale is inherently complex, dealing with issues such as globalpositioning of companies, corporate cultures, and the allocation of resources. To better understandthe advantages gained from the Adidas­Reebok merger, we have examined the following: Throughthese various analyses, we have discovered that the importance of branding is paramount forsuccess in this industry. Our research also identifies the specific danger of competition betweenAdidas and Reebok. Our analysis of the Adidas­Reebok merger shows how it will gain asustainable competitive advantage that may one day dominate the footwear industry bothdomestically and internationally. The fact that Adidas and Reebok control such different aspects ofthe shoe industry will help to ensure their success. To fully understand how Adidas­Reebok willgain a sustainable competitive advantage over Nike, the situation must be looked at from severaldifferent points. These include industrial, customer and competitor analyses, as well as a look atthe different marketing strategies and changing marketing trends. Adidas Core Competencies –Technology – Customer focus – Brand recognition – Supply chain – Collaboratively competitiveReebok Core Competencies – Trend Identification – Ability to market to a niche segment

11. 11. – Women's shoe design – Design expertise – Celebrity relationships Combining CoreCompetencies Combine – Adidas technology with Reebok design – Adidas sports with Reebokwomen's market – Adidas shoes with Reebok apparel – Adidas global strength & Reebok USstrength Implementation Blending the two cultures successfully (learning to work together) Protectthe strengths of acquired company (keeping development of both organisations separate)Maintaining both brands (keeping established market share) Capitalising on supply chaineconomies of scale (suppliers, manufacturing, distribution, channels) Nurturing the partnershipbetween technology and design (growing market share by combining leadership areas) Sustainablecompetitive advantage The athletic apparel and footwear industry emphasises branding more thanany other competitive advantage. Through the use of advertisements, endorsements, promotions,and licensing agreements, the top companies in this industry have devoted much of their resourcesto brand recognition and loyalty. Adidas' acquisition of Reebok will develop increased

High level of long­term borrowings Though the company reduced its borrowings by E181 million against 2002, the level of bo...

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opportunities to achieve competitive advantage through branding. Furthermore, extended licensingagreements and contracts will allow the Adidas Group to sustain this advantage. Sustainablecompetitive advantage cannot be reached without the successful merging of Adidas and Reebok.The key to this success is how well they identify themselves. There is a very real danger ofcannibalisation to occur between the two separate brands, where one brand takes away the othersconsumer base. However, Adidas Chairman and CEO Herbert Hainer made clear that "it isimportant that each of these brands must retain their own identity." Hainer points out that Reebok'sfocused strategy is on the engagement of youth through sports, music, and technology. Reebok, hepoints out, is a lifestyle brand. On the other hand, Adidas' focus is on superior technology andperformance, coupled with a large international presence. As Hainer points out, "Adidas haspositioned part of its product range in the lifestyle segment, but thecompany relies on theperformance market. Lifestyle success to an authentic company is a bonus." Adidas will benefitfrom increased distribution in North America, where Reebok already has a significant presence.The addition of Reebok will enhance not only its position among the top US

12. 12. distributors like Foot Locker and Dick's, but will also give Adidas­Reebok more power overpromotions and in­store displays. Increasing its presence is the key to achieving sustainablecompetitive advantage, because the increased presence further engrains the most importantadvantage in this industry, brand name. The acceleration of both brands is brought about throughincreased operating cash flows. Along with the increased operating capital, other synergies such asoperating savings are realised. Catching up to Nike's huge marketing budget is a challenge, but theincreased operating costs coupled with the synergies will help promote further brand recognitionthrough marketing. Reebok has an extensive line of men and women's apparel. The new companycan combine Reebok's apparel with Adidas' new addition of fashion designer Stella McCartney,who has created an apparel line that integrates both sport and style. This innovative move showsthat Adidas continues to look for new opportunities and markets in order to gain a competitiveadvantage. In the past, Adidas has not been able to expand because it had problems shipping goodsto the United States. It takes them about 14 days to ship from their factories in the Far East whileReebok can ship overnight. In the future, Adidas will be able to take advantage of Reebok'sexisting distribution infrastructure in the U.S., while Reebok will be able to benefit from Adidas'existing distribution infrastructure in Europe. The Reebok brand will also gain sustainablecompetitive advantage through increased brand recognition. Globally, Reebok will benefit greatlyfrom Adidas' distribution around the world. Coupled with the cost savings and increased cash flow,Reebok's marketing resources could increase. Combined R&D is helping speed development ofcutting edge technologies, an important feature of the increasingly fast paced industry. Expeditedresearch will develop higher consumer demand for innovation across all brands, putting pressureon Nike's R&D capabilities. II­ FROM CORPORATE TO MARKETING STRATEGY Porter'sFive Forces Barriers to Entry ­ Low Adidas and Reebok combined are able to control their costseffectively, giving them an advantage over emerging competitors in the industry. Their web sitesare well­ prepared and updated promotions attract online shoppers. There are many exclusiveproduct differences in this industry that gives brand identity an immediate competitive advantage.The Adidas and Reebok brand is well­known globally and plays a major role in consumer decisionmaking. Selling footwear is highly competitive; however, barriers to enter into this industry arequite low. Therefore, the footwear industry is broad with hundreds of retailers. Switching cost islow for the

13. 13. consumer, and may occur frequently depending on consumer preference and other factorsaffecting consumer buying decision. Bargaining Power of Buyers ­ High There are a large numberof buyers relative to the number of firms in this industry. Therefore, companies like Adidas, andReebok must continuously market their product and differentiate their brands against competitors,in order to increase sales and market share. The use of online tools has helped to enhance theaccessibility among users. Brand identity plays a critical role in the buying behaviour; strong

retail stores. The company also planned to implement a new model for its supply chain, which will considerably reduce the ...

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identity will offer consumers trust and loyalty. Bargaining Power of Suppliers – Low There aremany suppliers in this industry. In essence, there is very little differentiation among the supplierswhich makes suppliers' bargaining power non­existent. Leather, rubber, and cotton are commodityitems and are available abundantly in the market place. Conglomerates such as Adidas, andReebok have a definite advantage and power over their suppliers. These suppliers becomedependent on these firms as their means to survival. Additionally, Adidas, and Reebok havestandardised their input procedures pertaining to the materials used, their labour force, supplies,services, and logistics. Firms are able to switch between suppliers quickly and cheaply, due to theglobalise networks of cheap labour on various continents. Threats of Substitutes ­ Low Buyers'propensity to substitute is low. Consumer substitutes for athletic footwear products are lowbecause there are little alternatives to switch, some substitutes for athlete footwear could be boots,sandals, dress shoes or bear feet. Consumers are not likely to substitute due to the performancespecification of the product. For instance, a basketball player would not wear boots to playbasketball. Therefore, there are no real substitutes for athletic footwear. Rivalry among ExistingCompetitors ­ High The rivalry among existing competitors in the footwear industry is quite high.Large firms such as Nike, Adidas and Reebok have grown immensely over the last two decades.Their global reach has expanded through all continents; this is evident using the Internet and e­commerce. Online selling has enlarged the reach for these firms allowing them to increase saleswhile minimising operating costs. Almost every large firm has a web site, and most of these websites contain virtual stores which provide convenience to consumers. Most individuals in NorthAmerica have access to high speed Internet and online purchasing has become the new trend forthe twenty first century. Threat of Substitute Products or Services (low)

14. 14. ↓ Supplier Power (low) → Rivalry Among Existing Competitors (high) ← Buyer Power (high)↑ (low) Threat of New Entrants Reebok is located in the upper­left portion of the chart, identifyingit as employing a cost leadership strategy. It is concerned with offering affordable shoes to a verybroad market. Adidas is located in the upper­right portion of the chart, identifying it as employinga differentiation strategy. This company is constantly developing new technology and innovation

15. 15. in the industry. Examples of this include the new microchips Adidas has developed tomechanically adjust the shoe's cushioning. SWOT Analysis Adidas­Salomon SWOT Analysis(before the merger) Adidas­Salomon was a leading player in the sports good manufacturingindustry. The company had posted a very steady growth in its sales revenues in recent years,essentially as a result of its strong brand image. The company had market leading products andstrong brand names including Adidas, Salomon, TaylorMade and others which were furtherstrengthened by its strong commitment to product innovations. Furthermore, on the supply­chainside the company's commitment to reduce lead time for manufacturing footwear had enabled thecompany to avoid the warehousing of products. Strengths Leading player in the sporting goodsindustry The company was amongst the top players in the sporting goods industry due to its strongbrands, market­leading products and commitment to sports for meeting consumer expectations.The global sportswear market (Euro 45 billion) was dominated by Adidas­Salomon and Nike and,at a certain distance, Reebok, PUMA and New Balance. Adidas­Salomon's brands include Adidas,Salomon, TaylorMade and others, which had very strong brand name recognition in marketsserved. The company's products served many markets and include footwear, hardware, apparel,snowboard, golf­related and other products. Steady increase in sales revenues Adidas­Salomon'srevenues from sales have been steadily increasing as reflected in the last five years' salesperformance ending 2002. From E5.1 billion of sales in 1998 to E6.5 billion in 2002, theperformance has improved by a CAGR of 7%. Though sales declined by 3.9% in 2003 over 2002,it was mainly due to currency translations. The company has been able to achieve this steadygrowth in revenues due to its strong brand image, continuous commitment to product innovationthat is consumer focused. Such a steady growth in the company's revenue performance helped inmaintaining a very good image for the company and improved investor confidence. Additionally,

The company's manufacturing activities were mostly concentrated in China and other Southeast Asian countries. Since most o...

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the company reported an outstanding operational and financial performance in the first half offiscal 2004. This underlined the company's momentum, with quarter on quarter salesimprovements for all brands, and a record gross margin and earnings growth of almost 40%,marking the strongest first half year performance in the company's history. Successful new productinnovations The company had consistently launched new products and this has enabled it to widenits portfolio and also enhanced its competitive position. Each company brand targeted a specific

16. 16. market and new products were introduced based on their requirements. This has helped thecompany achieve a greater degree of success. During 2002­2003, the company launchedClimaCool and a3 in its running shoes category, which were big successes. The company sold over500,000 pairs in a3 and over one million in ClimaCool. Furthermore, in the basketball shoesdivision, the T­MAC and T­MAC were the bestselling in the US market in 2002 which has led tothe release of T­MAC 4 lace less footwear for 2004. The company's continuous commitmenttowards new product innovations not only improved revenues but also helped in strengthening itsrelationship with its customers and attracts new customers. In May 2004 the company introducedwhat the company described as the first Intelligent Shoe ­ called "1", the shoe provided intelligentcushioning by automatically and continuously adjusting itself. Lead time improvements Thecompany had considerably improved the lead­time required for footwear manufacturing throughlean manufacturing principles. Earlier in 2000, the company used to take 120 days for producingfootwear; by 2003, this had been reduced to around 60 days. Such a reduction was made possibleas a result of the company's efficient implementation of lean manufacturing principles whichhelped in removing non­value­adding procedures and activities, improved labelling, specialhandling and other such activities to reduce time taken. These process improvements have helpedthe company in avoiding warehousing of its footwear products. Marketing strength The companyhad planned and implemented major advertising campaigns during 2004. The company's immensesize and strong position have afforded it the opportunity to undertake global advertising campaignswith focus on TV, print media and outdoor advertising as well as point of sale and PR activities.The campaign "Impossible is Nothing", included top athletes from different disciplines such asMuhammad Ali and his daughter (brand image, boxing and lifestyle), Haile Gebrselassi (brandimage, running), David Beckham (brand image, football) and Tracy McGrady (brand image,basketball). Weaknesses Unfocused strategy The strategy of Adidas­Salomon was lacking focus.This is because it has a very broad product portfolio, including sport performance products forathletic sports, basketball, golf, tennis, Nordic disciplines, cycling and fashion oriented products.Rival Puma has demonstrated that focus can translate into a high profitability. Over­dependence onAdidas brand segment While the purchase of Salomon, the French maker of ski and golf gear,steered the company into the equipment arena, the company generated 79% ($4.9 billion) of itstotal revenues of E6.3 billion from the Adidas brand segment in 2003, while the other twocontributed to the balance. Despite a strong image for the TaylorMade and Salomon brands, theygenerated only about 21% of the total revenues. The company's over­dependence on the Adidasbrand segment, which mainly serves the athletes' requirements, makes the company's overallrevenues susceptible to the market conditions in this segment.

17. 17. High level of long­term borrowings Though the company reduced its borrowings by E181million against 2002, the level of borrowings was still very high. At the fiscal year end 2003 thecompany's long­term borrowings as a percentage of equity were very high at around 146%, whichamounted to E1, 574 million. Such high debt level affected investor confidence in the companyand makes low­cost funding of growth plans difficult. By half year fiscal 2004 strong cash flowhad enabled more progress in debt reduction has been (net borrowings at June 30, 2004 were E967million, down 39% or E616 million versus E1, 583 billion in the prior year) made but debtremained high. Order cancellations 2003 revenue growth was substantially below the company'sfirst impression from year­end 2002 order backlogs, which were up a strong 14%. As 2003revenues growth was only 5%, significant order cancellations in the course of the first half of 2003

The company employed a strategy of reinventing its brands in order to gain market share. In order to enhance its Reebok br...

60% global market share could cause problems in the future. Futures growth for these five brands was around 9.5% on a doll...

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are evident. The company achieved revenues that totalled E6, 267 million ($7,570.4 million), adecrease of 3.9% against the previous years revenues that totalled E6, 523 million. OpportunitiesStrategic acquisitions and agreements The company made a few strategic acquisitions during 2004.In September Adidas and Stella McCartney announced a long­term partnership in New York,presenting the Adidas by Stella McCartney sport performance collection. For the first time ever ahigh­end fashion designer had created a functional sport performance range for women. The firstcollection was available in stores across the US, Japan and Europe in spring/summer 2005. Itoffered products for running, gym/workout and swimming as well as cover­ups. The Adidas byStella McCartney range shows the company's willingness to innovate in the women's sportswearmarket. Adidas­Salomon acquired Valley Apparel Company of Cedar Rapids, Iowa in June 2004, aproducer and distributor of collegiate and professional league apparel and accessories. It servedsmall­ to mid­ size retailers, such as sporting goods stores, department stores, fan shops andcollege bookstores. It has a reputation of producing and delivering large quantities of apparel andbranded accessories within hours of a team's victory. In early 2003, the company acquired theMaxfli brand of accessories and other golf related products from Dunlop Slazenger Group throughits TaylorMade­Adidas division. This acquisition has helped the company in offering marketleading products in all the golf categories and has improved its global market share to 16% fromless than 1% prior to the acquisition. The company also entered into a strategic agreement in June2003 with the INTERSPORT International Corporation (IIC), a multi­sport retailer, in order tostrengthen its sales and distribution network. Specifically, the four year agreement will ­ in time ­strengthen the company's sport performance, casual, Salomon and other products' sales. Supply­chain and manufacturing initiatives The company's success in reducing footwear manufacturingtime was likely to continue in the future also. The company planned to reduce its production timefurther, which has helped the company achieve faster delivery of its products to the retailers,thereby reducing inventory costs. On the supply­chain side, the industry faces a problem due tolonger time to market. The total time taken is about 15 to 18 months of which 12 months are spentin creation of the product, while the balance of the time in arranging for the raw materials,production and delivery to the

18. 18. retail stores. The company also planned to implement a new model for its supply chain, whichwill considerably reduce the time taken and improve cost efficiency, etc. This initiative helped thecompany in serving its customers faster, thereby gaining a competitive edge over its peers.Sponsoring sporting events The company's sponsorship of major sports events brought greatrecognition to its products. Adidas supplied more than 1.4 million products to federations,volunteers, officials and others during the 2004 Olympics. Following a successful marketingcampaign at the Euro 2004 Soccer Tournament in Portugal, the company once again expected toachieve new record sales in football during 2004. During 2002, the company sponsored FIFAWorld Cup Championship in Korea and Japan and was acclaimed as the most visible among thebrands advertised during the event and was viewed by 44 billion cumulative spectators during thecourse of the event. Furthermore, in the Winter Olympics of 2002, the company sponsored over50% of the participating athletes who won about 200 medals. Adidas has a life­time agreementwith Kevin Garnett (most valuable player of the NBA 2003/2004). It also signed a six­yearcooperative agreement with Chinese Football in June 2003. The company sponsored the WorldCup in 2006 held in Germany. Sponsorship of these events helps the company in building its SportHeritage, Sport Style and other such divisions. For instance, the Sport Heritage division grew intoan Euro 900 million businesses and doubled its sales from 2001 to 2003. Own retail stores In 2003Adidas generated 9% of group revenues in own retail outlets. A significant number of new shopsdid not positively contribute to earnings because the cost for new shops (of hiring of sales peopleand training costs etc.) exceeded early revenues. This will begin to level out going forward and thecompany will continue to open own retail shops. Management recently explained that own retailsell­through was positive in the US in 2003 in contrast to external customers. The company is

Footwear is Reebok's largest division and the company relies fairly heavily on the footwear market. That was a competitive...

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therefore planning to open 15 new US shops in the coming two years and 40 worldwide.Management expects Sport Heritage to grow again from 2004 driven by more own retail stores andno more cutting of external points of sales. Threats Competition Adidas operated within a highlycompetitive market which in many cases overlaps into other markets as sportswear retailersincreasingly compete with fashion retailers. The company's traditional competitors like Reebok,Nike and Puma made competitive levels intense, but the addition of casual footwear and apparelmanufacturers such as Tommy Hilfiger, adding a designer edge to the market, had increasedcompetitive levels. Companies had come under increasing pressure recently from productsdesigned for the value conscious consumer. Adidas have long been one of the premium brands insportswear and have charged accordingly, though this strategy is coming under more pressure ascheaper substitute products are bought by consumers adding to problems in terms of customerretention. Foreign exchange fluctuations

19. 19. The company's manufacturing activities were mostly concentrated in China and other SoutheastAsian countries. Since most of these countries transact in US Dollars, the company incurred about70% to 80% of its outsourcing expenditure in US Dollars, whereas, the company's revenuegeneration in US dollar and other non­Euro currencies is comparatively lower. Hence, adversechanges in the exchange rate between US dollar and Euro had a negative impact on its overallrevenues. Weak global economy The GDP of European countries have grown at a negligible rateand are unlikely to improve in the near future. Similarly, the Latin American markets such asArgentina and Brazil continue to witness weak economic conditions, while the Southeast andMiddle­East regions continue to reel from political unrest. Thus, the company's revenues weresignificantly affected due to these adverse economic conditions. Impact of scandals in the US andGermany Accounting scandals across industries in Germany and the US have impacted upon thecompany's stock performance. The weak performance of many companies in the sports goodsindustry adversely affected the investor confidence in the industry. Thus, external factors can havean adverse impact on the company's stock price performance and might in turn affect its brand'svalue. Reebok SWOT Analysis (before the merger) Reebok International was a major player in thesports and fitness products market, with a particular emphasis on footwear. Its main strengths liedin its size and strong brand awareness. While footwear is clearly its core product, concerns werebeing raised over its comparative disinterest in the associated athletic apparel market, which is overtwice the size of the footwear market. Strengths Growing sales revenue As part of a strategy togrow quality market share, the company continued to invest in three key product and marketingplatforms: Performance, RBK and Classic. Reebok International was the second largestmanufacturer of athletic shoes in the US, behind Nike. The Reebok brand continued to drive salespushing it closer to major competitors, Nike and Adidas. Reebok had become the number two ornumber three brand in most of its overseas markets. It held around 10% of the global market,compared to Nike's 34% and Adidas' 15%. The company has been able to increase revenues andimprove operating margins despite some challenging retail conditions in many key markets aroundthe world in 2004. Excellent marketing strategy

20. 20. The company employed a strategy of reinventing its brands in order to gain market share. Inorder to enhance its Reebok brand, the company introduced a new street inspired productcollection, RBK, in 2002, followed by an effective marketing strategy which carried into 2003 and2004. During 2003/2004, the Reebok product offerings generated healthy sell­through performanceat retail. Alongside reinventing brands, the company introduced new marketing campaigns topromote them. To support the RBK product Reebok created a marketing campaign entitledReebok's "Sounds and Rhythm of Sport," which fuses music and entertainment with sports andperformance. The combination of relevant products and a new marketing campaign improved theperformance of the Reebok Brand in the athletic specialty channel of distribution. Reebok hasachieved positive market share comparisons in the critical athletic specialty and sporting goodschannels of distribution (as of October 2004). Celebrity associated sponsorships The company

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expanded its product offerings into more lifestyle and performance categories, introducing newproduct segments for both the NBA and NFL, including NBA and NFL footwear, classic lifestyleapparel and performance gear for off­the­field activities. Reebok sponsored many top athletes intennis; Andy Roddick and Venus Williams; as well as music stars Jay­Z, Pharrell Williams and 50Cent. Yao Zing's impact in the Asian market is hugely important to Reebok. Affiliating itself tosuch globally renowned celebrities enhanced the company name among many different customergroups. Strong women's sector Another one of Reebok's strengths was its success in the women'ssector. The market for women's athletic shoes is larger than that for men, accounting for around46% and 40% of the sector's value respectively. In volume terms, the women's sector was evenmore important, 46% compared to 35%. Reebok's market share of women's athletic shoe sales wasaround 35%, and has been boosted by its 'It's A Woman's World' marketing campaign. Weaknesses'Classics' under fire The company had come under fire from its rivals in the classics department. Inthe past Reebok has controlled this shoe category without much competition, however companiessuch as Nike and Adidas were coming up with their own 'classic shoes'. Reebok were still themarket leaders in that area but the gap kept narrowing. Low market share in apparels Reebokcontrolled only about 1.4% of the apparel market. This posed a problem when squaring up with itsfierce competitor, Nike. The footwear market's growth was slowing. Athletic apparel gives scopefor a larger and more diverse range of products, keeping the market fast moving. The apparelmarket was 2.4 times larger than the footwear market. Nike took charge there, with its innovativedesigns, and contracts with sports teams and organisations throughout the world. Danger ofstockpiling products by retailers Futures, or ordered in advance sales, represented around 60­70%of Reebok's business. This has been valuable to Reebok in the past; however five of the company'sbrands that represent around

21. 21. 60% global market share could cause problems in the future. Futures growth for these fivebrands was around 9.5% on a dollar­weighted basis. This growth was alarmingly fast. Reebok hadto be careful as retailers may be ordering more than they can sell. This could result in a sudden cutoff in orders, leaving the company with large inventories and a decrease in sales. OpportunitiesIncrease average shoe price Reebok's average price per shoe in athletic footwear stores, whichaccount for around 15% of the market, was considerably lower than average. Its average price pershoe is $45, compared with an outlet average closer to $60. The company's lower than averageshoe price is partly due to the high percentage of basic products sold, which is itself partlyattributable to its traditional position in the women's sector. This left plenty of space for thecompany to muscle in on higher priced sales, as its products and promotional efforts improve. Aswell as raising brand awareness, Reebok's sponsorship deals helped the company increase itsaverage sales price. Draw attention toward new technological developments Reebok had starteddeveloping its product to make it more modern and has invested heavily in added technology toenhance its shoes. Reebok had a lot to gain from a continued investment in more technologicallyadvanced, premium products. In 2003, the company introduced new fashionable andtechnologically advanced products tied to new integrated marketing programs. These displayed anenhanced and prominent vector logo which ties back to the Professional athletes wearing theproducts on the field. This branding created a real point­of­difference for its performance productsand should help to generate consumer interest at point­of­purchase. These products are supportedat retail with a new performance marketing campaign, which utilises the athletes and the vectorlogo in new and creative ways. This campaign included television, print and in­store marketingpackages. Encourage a strong brand push in Europe The company planned to enhance its Europeanmarket, recruiting new management talent and initiating an aggressive program to regionalise thisbusiness utilising a consistent brand image throughout Europe. Reebok executed unified product,marketing, and sales strategies across all borders in Europe, thereby presenting the Reebok Brandin a more relevant and consistent manner. Exploit Nike's lack of high profile sponsorship Nike, theworld's most successful sportswear brand and footwear producer struggled to fill the void vacated

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by Michael Jordan. This was the first time in a long time that Nike did not have an eminent sportsstar to spearhead their marketing drive. This has left an opening for the likes of Reebok to exploit,particularly in the basketball arena. The company took the Chinese sensation from Nike, YaoMing, hoping to increase market share by 10% to 30% by 2006. Threats Over reliance on footwearsales

22. 22. Footwear is Reebok's largest division and the company relies fairly heavily on the footwearmarket. That was a competitive field experiencing much slower growth than in previous years and,like most other producers, Reebok felt that it must do more to increase sales. Reebok had also to beaware that the market for more expensive footwear was slowing. This could ultimately force pricesdown, should this trend continue for a significant period of time. With the company so reliant onfootwear, it risked losses, whereas other competitors such as Nike can fall back on their appareldivision. Diverted from historical markets Reebok's original success stemmed from the women'saerobics market in the 1980s. It has since become apparent that the company has shied away fromits roots. Reebok's women's products represent only 25% of its athletic apparel volume. Thewomen's apparel sector actually accounts for around 40% of industry sales, which suggests thatReebok risked losing out in the key market that transformed them into a global company.Potentially expensive new product marketing Until recently Reebok had not focused on either themen's or the women's apparel market for several years. Before it can build up sales significantly inthis area, it had to instil confidence back into consumers that it is good at producing more than just'classic shoes'. This process could've proven to be both time consuming and costly. Adidas­ReebokSWOT Analysis (After the merger) Strengths More products for different customers Increase inproduct line Acclivity in market share Now both upper and middle priced markets are covered.Shared R&D, Patents, technology & innovations Weaknesses Differing values among managementComplexity of joining two corporate cultures Both companies belong to different countriesOpportunities Reduction in costs Decreased competition Cross­over promotion by sponsoredathletes Enter to new market/Segments Threats Nike. Nike's possible acquisition of Puma. Dangerof cannibalisation between the two separate brands.

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