Nike transitions away from heavy discounts amidst positive results

Adidas has admitted it has a “long way” to go on the performance of its brand and business, after a year weighed down by discounting.

Adidas reported its 2023 results today (13 March), marking its first annual loss in over three decades. The company experienced a net loss of €58m (£50m) from continuing operations, while net sales remained flat year-on-year on a currency neutral basis.

These results actually exceeded expectations for Adidas during a challenging year. The brand encountered difficulties with its Yeezy line following its separation from rapper Kanye West due to anti-Semitic remarks, as well as a stock predicament.

Back in May, CEO Bjørn Gulden cautioned that the brand might face challenges in the upcoming year. Initially, it was projected to incur an operating loss of €700m (£598m) for 2023. However, the latest report shows a surprising operating profit of €268m (£229m), exceeding the initial expectations by around €1bn (£854m).

Rest assured, we are committed to pursuing growth without compromising the brand's integrity and value.

Bjørn Gulden, Adidas

Despite this progress, Gulden acknowledged Adidas has a “long way to go” towards becoming a truly “healthy” business.

The Adidas CEO mentioned to investors that the company had been reducing its reliance on discounts, even in a competitive promotional environment. Initially, heavy promotional activity had a negative impact on Adidas's gross margins earlier in the year. However, by the end of the year, the company had successfully decreased the amount of discounting.

Adidas explained that this strategic move was made in order to set the stage for a stronger performance in 2024.

Gulden mentioned that in the first few months of 2024, the company had kept promotional activity at a low level, with discounting rates in the single digits. He even admitted that the rates might have been "maybe too low, to be honest."

After a year of higher promotional activity than desired, Gulden reassured investors that Adidas would not rely heavily on this tactic in 2024. He emphasized that maintaining brand equity would be a top priority.

“I can swear to you that you shouldn’t be worried that we will do anything to get growth that will take brand equity away,” he said.

Driving ‘brand heat’

At the start of 2023, some people viewed Adidas as a weak brand that lacked innovation, according to Gulden.

Nevertheless, the CEO stated that despite facing obstacles, the sportswear brand has proven these beliefs wrong through innovations and generating a lot of "brand heat".

Adidas is noticing a rise in popularity for casual "terrace" style trainers, such as the Gazelle and Samba ranges. These styles have been particularly well-received this year.

In 2023, the company decreased its marketing spend compared to the previous year. Marketing and point of sales expenses went from making up 12.3% of sales in 2022 to 11.8% in the last year.

Gulden clarified that the current spending on marketing as a percentage of sales is lower compared to the past five years. However, he emphasized that this decrease does not indicate a shift in marketing priorities. Rather, it is a result of fewer major sporting events taking place this year.

He further explained, "Our marketing strategy focuses on maintaining visibility in the sports industry."

The company aims to be involved in all sports, not just mainstream ones like football. Adidas plans to boost its marketing efforts this year, especially with big events like the Euros and Olympics coming up, to keep strengthening its brand reputation.

Editor's P/S:

Adidas's recent financial results have been a mixed bag, with losses in some areas but surprising gains in others. The company's decision to reduce discounting has had a positive impact on its gross margins, but it remains to be seen whether this strategy will be sustainable in the long term. Adidas is also facing challenges with its Yeezy line and a stock predicament, but it is making progress in other areas, such as its casual "terrace" style trainers. Overall, Adidas has a long way to go before it can be considered a healthy business, but it is making some positive strides.

It is important to note that Adidas is not the only company facing challenges in the current economic environment. Many businesses are struggling with rising costs and a decrease in consumer spending. Adidas is taking steps to address these challenges, but it is likely to face headwinds in the coming months. Investors should keep a close eye on the company's progress and be prepared for further volatility in its stock price.