Adidas vs. Nike

Adidas is attempting to regain some of their market share that they lost to both Nike and Under Armour. Last year they finished in third place in the US market behind both Nike and Under Armour. Nike has had great success in signing athletes to help promote their athletic apparel. Under Armour has also been extremely lucky this year. Steph Curry and Jordan Spieth, two of the most popular athletes in their sports, are endorsed by Under Armour. Adidas has not had much luck on their side, but that may change. Recently, Adidas has increased spending on marketing by signing new celebrity partnerships with popular athletes. Last year, they signed Damian Lillard. Recently they signed James Harden, who will attract many young athletes. They are currently trying to make a big push by agreeing to partnerships with the NHL and sponsorship deals with top NHL and NFL players. Adidas plans on spending 13 to 14% of sales on marketing, compared with 10 to 11% for most rivals.

Nike controls much more of the market than Adidas does, but Adidas is currently seeing improvement with their new products and marketing ideas. I find it hard to believe that anybody will ever overtake Nike, but Adidas can compete better than they have in the past few years. Their sales growth rose by 6%; which is the fastest pace since 2011. I personally never liked Adidas apparel until I went to school at Southern Utah University. I feel that they their products have improved. I like Adidas more than I used to, but still would prefer Nike products over Adidas. 


Dr. Tufte said...

Jordan: 100/100 Make that link look pretty, or I will ding you 6 points.

So Jordan ... you're a student, so you personally get a pass on this. But I wonder if the author of the source article understands economics at all? What I'd like to see in these blog posts is some "neck exposure". As in, maybe I'm just a student, but it seems like I get economics better than the people in this article. You don't have to find a source that makes mistakes, but if one does ... I want you all to be brave enough to say something.

So what's wrong here? Owners (and ideally managers) want their firms to maximize profits. But the article is mostly about market share. What it says about net income is that it was up by 10%, and that's more than forecast. But they don't even tell us if the forecast was high or low. So how are we supposed to know if 10% is a lot or a little? And what's the rate of return? They do mention that the stock price did very well this year, but the "compared to what" aspect of that isn't explored deeply.

Instead, the article focuses on market share, and marketing budgets. Be very wary: when managers emphasize market share over profits it's usually because ... profits weren't that good. What owners want is ROI (or ROA, or ROE). Market share does them little good. But managers like market share quite a lot: market share often means more free cash flow, which is easily diverted into executive perks.

The same goes for marketing budgets. Just because a marketing budget is bigger does not mean the firm is better. The flip side of saying a bigger marketing budget is good, is asking why your marketing is so bad that you need a bigger budget to match what other firms produce from their smaller budgets.

None of this is to say that Adidas isn't following a better strategy that might make them more money in the future. What I am saying is that the source articles justification for that position sounds weak, like they're just regurgitating Adidas' own press releases.

SpencerM said...

I can see Dr. Tufte's point, and maybe one of Adidas tactics will be to get a lot of the media's attention in order to reach more audiences. It is interesting that Adidas has been around for so much longer than Nike, yet Nike's business model seems to have propelled them to be the market leader. I think it is good that Adidas is fighting to get some of the contracts with big name stars that could influence future generations.

It seems to me that Adidas is currently competing in many different markets. For athletic contracts the market seems like an oligopoly with few big competitors all selling basically the same product. There are also high barriers to entry making it hard for any new competition to arise. On the other hand, when it comes to casual shoes they seem to be competing in perfect competition. There are thousands of different companies that sell and produce casual shoes. There are also very few barriers to entry and many substitutes. We can see that mastering the principles taught in our economics class and learning about the nature of different markets is critical for companies such as Adidas to understand.

Jake Eliason said...

My favorite pair of tennis shoes is made by Adidas.

I think the article is a little strange how it does not link the reason to increase advertising to profits, but instead links it to market share. It doesn’t matter if your company has a majority of the market if it is not making any money. The goal of firms like Nike, Under Armor, and Adidas is to make a profit. It does make me hope that in relaying the article from the company someone shifted the focus from something they didn’t understand, to a more common term like market share. This would help readers be more prone to read the article, and offer a better reason for the change.

Adidas increased the amount spent in advertising and saw a benefit to sales. It could be possible that the own advertising elasticity of Adidas is more elastic than what is common in the market. If this is true, Adidas would be wise to increase marketing because they would see a beneficial response in sales, and hopefully profits. This would provide a much better basis for making the decision to increase advertising.

Dr. Tufte said...

SpencerM: 50/50

SpencerM has hit on an essential point to applying industrial organization: most businesses aren't operating in just one form. Instead, they are perfectly competitive for some products, monopolies for others, and so on. To be sure, I think Adidas is looking for those markets on which it can charge a mark-up. And getting celebrity spokespeople is one way to differentiate a brand to do that.

Jake Eliason: I do think there's a role for market share as a goal, but I think it gets abused as a general goal. Obviously, if your market is a fixed pie, then gaining market share is probably a good thing. But it gets harder to figure out if that pie is getting larger (or smaller). In all cases, market share is a more helpful goal if you average variable costs are low and stable. But again, it's not clear this is always the case.

It's slightly off topic, but there evidence in the finance literature that excess focus on market share is a symptom of an agency problem between owners and managers. Market share is associated with free cash flow, which is easier for managers to appropriate.

Dr. Tufte said...

Jake Eliason: 50/50 (although your comment doesn't read very well, I didn't see anything specifically wrong with it). Sorry for forgetting a score in my last comment.