8.18.97 Adidas
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August 18, 1997


Back in the game the venerable German shoemaker has pulled its financial socks up. Now it's scoring some points in the U.S. market.

Charles P. Wallace

There isn't a Swoosh in sight. As a couple of hundred college coaches watch an exhibition game from wooden bleachers, the cream of American high school basketball prays for a smile or a nod. Sonny Vaccaro, the promoter who discovered Michael Jordan for Nike, works the floor like a politician. But instead of Nike's ubiquitous trademark, the three-stripe logo of Adidas, Germany's venerable sporting goods company and sponsor of this event, flutters from the rafters like a Teutonic battle flag. "Does Phil Knight want me dead?" crows Vaccaro, referring to Nike's billionaire chairman. "You bet."

Outflanking Nike with high school basketball summer camp might seem like a small skirmish in the multibillion-dollar global sneaker war, but it's part of a broad assault being mapped for Adidas by President Robert Louis-Dreyfus, the perpetually rumpled French financier who has engineered an impressive turnaround at the German shoemaker. Adidas has become that rare case study: a former market leader that's regaining its footing, after being all but crushed by an upstart rival like Nike. It's as if Apple Computer came back to challenge Compaq.

In a scant five years, Adidas has pulled back from the brink of bankruptcy, gone public, and seen its stock price triple. Its revenue jumped from $1.7 billion in 1992 to $2.8 billion in 1996. Earnings per share rose 28% last year, and company officials insist that profits will keep expanding at a similar rate for at least three years more. Adidas has slimmed down its management ranks, moved manufacturing out of costly European plants, and undertaken a huge increase in spending on marketing. The 51-year-old Louis-Dreyfus, a sports fanatic with a Harvard MBA, has turned his $10,000 initial investment in Adidas into a prodigious personal fortune of some $390 million.

Now, having cleaned up the company's balance sheet (its debt will be paid down entirely in a couple of years), Louis-Dreyfus is pressing his U.S. executives to boost the company's performance in the all-important American market. They have a long way to go: Adidas still commands only 5% of the athletic shoe business in the U.S., compared with 40% for the fearsome Nike and 16% for Reebok International. But thanks to new blood like former Nike basketball chief Vaccaro--and some other talented apostates from that firm--Adidas is back on the playing field. Its logo is turning up once again on the shoes (and T-shirts and sweats) of American kids. Last summer it signed a $10 million promotional deal with Kobe Bryant, a teenage prodigy making his NBA debut. Then, a few months later, it trumped Nike with a $100 million agreement under which baseball's New York Yankees will wear the Adidas logo.

Robert Louis-Dreyfus

"I think we will be like Coke and Pepsi," Louis-Dreyfus says." In shoes, we know who is Coke, unfortunately, so we figure Adidas will be Pepsi without the food business. There will be niche players like Seven-Up and Schweppes. But there will no longer be five big players."

Sure, it's a wildly optimistic assessment: Nike had a record year last year, boosting net income to $795.8 million, nearly four times Adidas' net of $184 million. But the rejuvenated Adidas has climbed to within easy reach of Reebok, which has been struggling in the past couple of years (see box), and it is steadily regaining market share lost to such other brands as L.A. Gear and Fila. Says Andrew Lockhart, who follows the sportswear market for stockbroker Robert Fleming Securities in Frankfurt, "The momentum is now in Adidas' hands, not in Nike's hands, where it has been for the past ten years."

And the ever intense Phil Knight is, at least, looking over his shoulder. "It's becoming a very, very competitive business, and we take the threat from both Adidas and Reebok very seriously," the Nike chairman says.

Before it was unseated by Nike in the 1970s, Adidas was the Goliath of the sports world. Founded in 1948 by Adi Dassler, a brilliant Bavarian shoe designer, it outfitted everyone from Al Oerter in the 1956 Olympics to Kareem Abdul-Jabbar in the NBA. But after it grew big, the company was rent by family quarrels. Adi's brother, Rudolf, stormed off and opened the rival firm Puma. Adi's son, Horst, split with his parents and opened a rival branch in France, complete with its own designers and factories. Horst eventually took over the parent company in 1985. By then Adidas' share of the key American market was crumbling; once as high as 70%, it dwindled to just 2% in the face of the onslaught from Nike and then Reebok.

Designers at the Portland Lab

Horst died in 1987, leaving Adidas leaderless. His sisters finally sold the company in 1989 to Bernard Tapie, a roguish French financier, for only $320 million. Although Tapie promised to inject $100 million into the firm after buying it from the family, he was so preoccupied with his own left-wing political ambitions that he paid scant attention as the company slid into losses. Tapie became embroiled in a soccer-fixing scandal while he was France's Urban Affairs minister and was sentenced to 18 months in prison. He was declared bankrupt, and Adidas fell into the hands of his creditors.

By the time Louis-Dreyfus was asked to take the helm in 1993, Adidas was losing losing more than $100 million a year. Louis-Dreyfus was an outsider in the sneaker business. What special insights did he bring to this hotly competitive game? "Absolutely zip," he says, firing up a Monte Cristo cigar with a blowtorch lighter. "All I did was borrow what Nike and Reebok were doing. It was there for everybody to see."

The scion of a French trading and banking clan (and cousin to Julia Louis-Dreyfus of TV's Seinfeld), Louis-Dreyfus was already a wealthy man. He's not entirely disingenuous when he says he's in the business as much for the fun as for the money--he likes to rub elbows with Adidas stars like tennis queen Steffi Graf and runner Donovan Bailey. Most days he commutes to work in Germany by jet helicopter from a ski house in Davos, the Swiss resort town. To wave the Adidas flag, he even ran the Boston Marathon in 1995.

But if Louis-Dreyfus brought no special expertise in shoes to Adidas, he did bring serious credentials as a turnaround artist. Trained in finance at merchant bank S.G. Warburg in London, he was working at the family firm of Dreyfus SA--one of France's largest privately held companies--when he lost a bet one night and agreed to represent a wealthy friend on the board of IMS, a market research firm. Intrigued by the business, he quit the family firm to become IMS's chief operating officer, built the company up from a market cap of $400 million to $1.7 billion, and sold it to Dun & Bradstreet in 1988.

New Model

Retired and bored at age 42, with more than $10 million in his pocket, Louis-Dreyfus was asked to try to rescue Saatchi & Saatchi, the huge London advertising agency, which had become bloated with acquisitions. He restructured and recapitalized the company, sold off businesses, and slashed 4,000 jobs. The agency, now called Cordiant, returned to profitability in 1993.

It was in 1992 that Jean Paul Tchang, an old friend from Dreyfus SA, approached Louis-Dreyfus about trying to rescue Adidas. Tchang was an executive at Banque de Phenix in Paris, which, together with Credit Lyonnais, the troubled French state bank, had taken control of the firm. Louis-Dreyfus agreed to take Adidas on, but only after winning extraordinary terms from the banks. He bought 15% of the company for virtually no money down and got an option to buy the remainder at a fixed price. And he persuaded the banks to invest $100 million in new capital.

On his first day at work, Louis-Dreyfus was astonished that the president was asked to approve a salesman's expense account for $300. He realized that his greatest enemy would be the company's ossified bureaucracy, built up over several generations. "I found it distressing at the beginning that it was a very self-centered, German company, absolutely sure they were right," Louis-Dreyfus recalls. "Unfortunately, the only way you can change this is by letting people go."

In a matter of weeks, the entire German senior management of the company had been fired. Louis-Dreyfus installed a French friend from IMS as head of sales. He named a Swede as head of marketing and an Australian as finance director. The official language of the company, which is based in the North Bavarian town of Herzogenaurach, became English.

Adidas had already closed down the company's high-cost factories in Germany and Austria by the time Louis-Dreyfus arrived. But the company still had manufacturing operations in France, which had been protected by Tapie's political ambitions, so Louis-Dreyfus offered to sell the remaining factories to the employees for a symbolic single French franc. (The company's payroll, which touched a high of 14,600 in 1987, slimmed down to just 4,000 in 1994.)

Louis-Dreyfus then fired Adidas' management in Asia, which had failed to match competitors' low costs in subcontracting shoemaking to local companies. "Every senior manager in the Far East was replaced," said Glenn Bennett, a 31-year-old former Reebok executive who now heads Adidas' sourcing team in Asia.

Adidas: Sneaking Up

While Louis-Dreyfus was working to bring costs down, he took a gamble on the marketing side. As Adidas lost market share in the 1980s, the company had slowly cut back its marketing budget to stem the tide of losses. By 1993, marketing had slipped to only 6% of sales. Louis-Dreyfus decided to bet the farm by doubling marketing spending. "I learned the hard way at Saatchi's that you can cut costs to the bone, but if you don't have growth, you're in poor shape," he says. At the same time he cut the company's traditional dependence on sponsoring sports teams so that half the budget could be devoted to high-impact advertising on outlets like MTV that are popular with kids.

Even though sales have doubled, Louis-Dreyfus has kept the marketing budget at 12.5% of revenue. "We used to make one spot a year," said Tim Delaney, creative director of Leagus/Delaney, Adidas' London ad agency. "Now we're making 40."

In the critical American market, Louis-Dreyfus initially was blessed with several strokes of good fortune. Just as he arrived at the company in 1993, the fashion world went crazy for 1970s styles, and suddenly Adidas, which had dominated the field during that decade, became hip again. Madonna appeared in a slinky gown fashioned out of an old Adidas tracksuit. Trendsetters like supermodel Claudia Schiffer began showing up in the company's apparel. At the same time, Reebok, which had surpassed Nike in the late 1980s, stumbled badly, and consumers were looking for a new brand. A retro line of Adidas shoes, called Originals, was a huge hit. "The big luck was that it gave us time. It gave us breathing space for 18 months," Louis-Dreyfus says.

Another bit of luck: Before Louis-Dreyfus took over, Adidas had engaged the services of a pair of Nike defectors, Rob Strasser and Peter Moore. The two men had designed the hugely successful Air Jordan line in the mid-1980s and then left to form their own company, Sports Inc., in Portland, Ore.--just down the road from Nike headquarters in Beaverton. Strasser, a lawyer by training, had a genius for shoe marketing. He urged Adidas to go back to its roots as an athletic performance brand, and the company listened. Adidas shed fashion brands like Le Coq Sportif and Pony, and split its core business into units by sports: basketball, baseball, and cross training were controlled by executives in the United States, while sports like soccer and tennis remained at the home office. Adidas merged its U.S. operations with Sports Inc. and set up a design center in Portland.

Strasser died of a heart attack at an Adidas board meeting only a few weeks after Louis-Dreyfus took over. But he left the company with a clear marketing strategy, and armed with the cash injection from the banks, Adidas finally had the wherewithal to pursue it. Adidas soon was able to pay the banks back, and keep a tidy profit, with an initial public offering in late 1995 that raised almost $2 billion. The shares, traded in Paris and Frankfurt, have soared from an opening price of $42.50 to $132 at the end of July. (For U.S. investors, the company plans to introduce American depositary receipts by early next year.)

Even with its serendipitous breaks, however, regaining market share in the shoe business has proven difficult for Adidas. The company's rebound has been built largely on a huge increase in its apparel business, which now accounts for more than 50% of sales. "Nike had such explosive growth on the footwear side that they lost sight of apparel, and Adidas was able to find a niche in the market," says Keith Daley, vice president of the Foot Action chain of sports specialty stores.

But Adidas blundered badly with basketball sneakers, which account for nearly half the American market for athletic shoes, introducing a line that was unpopular with kids and retailers alike. Louis-Dreyfus takes the blame for not realizing earlier how important it is to use "icons" like Michael Jordan to market the product. "Frankly, it's an embarrassment," he says.

One result was another cold blast from Herzogenaurach: Louis-Dreyfus has forced Adidas' entire executive team dealing with basketball to walk the plank. To appeal to kids, he has signed the $10 million promotional contract with Kobe Bryant and taken a $12 million gamble this year with teenager Tracy McGrady, drafted by Toronto. In search of marketable icons, Adidas sponsors an annual basketball camp in which promising high-school players are invited to show their stuff to college coaches.

Louis-Dreyfus also hit upon the idea of building loyalty in its promotions by offering partial payment in Adidas stock. The first beneficiaries are the Yankees. "Our assets are going to make that company better, so it was only logical" to take part payment in stock, says Derek Schiller, Yankee vice president for business affairs. Adidas officials say it's likely that they'll use stock payments to maintain brand loyalty with European soccer teams, where Nike and other rivals have been trying to pick off Adidas stars.

The deal with the Yankees also provides an insight into how successfully Adidas has shed its former arrogance and bureaucratic ways. According to Robert Erb, Adidas' director of sports marketing, while Nike and Reebok also got calls from the Yankees about a sponsorship deal, Adidas moved more quickly. "The beauty of it was, Robert just said 'Go.' We didn't go back and create a Yankee committee to do an analysis. We all got on a plane and flew to New York." Adds the Yankees' Schiller: "Adidas put together a package very, very quickly, and the others did not. Instead of dictating, they listened."

Adidas is pinning its hopes on a new technology developed at its Portland operation called Feet You Wear, which, the company claims, provides better support by carefully following the contours of the human foot. "We have huge market share to gain in the United States," said Steve Wynn, president of Adidas America. "We're very focused on what we need to do right now. In 1998, you're going to see some very big improvements in our sales."

An open question is how long Louis-Dreyfus will stay involved in the company now that Adidas has been restored to profitability. He has a contract until 2000, but he acknowledges that he had more fun saving the company than he does running it on a day-to-day basis. He recently became a director of the Tag Heuer watch company in Switzerland, and he's spending more time with the Marseilles soccer team he owns. His Russian-born wife is expecting twins, and Louis-Dreyfus has vowed to spend more time with his 5-year-old son.

But Louis-Dreyfus says he's happy where he is. "If I were ten years younger, I would try another mountain to climb," says Louis-Dreyfus. "But I am 51 now, and it's a very enjoyable business. I don't go to work, I go to sports."