Adidas has said that despite the coronavirus-induced uncertainty surrounding 2020’s sporting calendar, it has not cancelled any marketing contracts around events like the Euros and Tokyo Olympics. It will “continue to invest in assets… if it makes sense,” it said, though admitted it could lose up to €70m in sales if they are postponed.
Adidas is a major backer of Euro 2020, the global football tournament scheduled to take place across 12 cities in Europe later this year. It’s the official sponsor for teams such as Germany, Spain and Belgium. But the summer schedule is in doubt in wake of the coronavirus outbreak after many European countries issued bans on mass gatherings, leading some football bodies consider having matches played behind closed doors to a digital audience.
At the time of writing, Uefa, organiser of the Euros, said it is taking advice from the World Health Organization and national authorities and has stated that it has no intention to cancel or postpone to tournament from its kick-off in Rome on the 12 June. However, rumours of a potential postponement to 2021 are widely circulating.
Meanwhile, the Tokyo Olympics – for which Adidas sponsors a number of athletes as well as the British Olympic Association (BOA) – is also going ahead as planned in July, according to organisers.
The sporting giant said it is “looking forward” to both events and has no intention to change its marketing plans around them. However it is braced to take what it claimed will be a small hit on sales in the event of a cancellation.
“Should they not take place, we estimate that the financial impact from a sales standpoint is between €50m and €70m. In the context of being a €23bn corporation that accounts to about 0.3% of our revenue,” said chief executive Kasper Rorsted, playing down the risk.
On a call with analysts for its update on the brand's performance in the last quarter of 2019 – during which the coronavirus was the sole topic of questions - Rorsted assured the bulk of its sales take place in the lead up to these events, rather than during, and that if they should be cancelled then people will still buy a pair or trainers or a football top.
“It's not like people say: ‘because the Olympics is not taking place, I'm not going to run tomorrow’ [or] ‘well, I'm not going to buy a new jersey, because there's not going to be any football’. So that's why we feel very confident around that number,” he said.
“So, we are not contemplating cancelling any contracts, we'll continue to invest into assets. And we'll continue to invest into revenue and brand driving activities, but of course, it has to make sense.”
Marketing spend for 2020 will not be 'squeezed'
Though Adidas says it will “spend where it makes sense” – it’s already stopped investing in China following a significant slow-down in the business following store closers – it largely intends to maintain its huge global marketing budget which in 2018 amounted to $3.5bn.
“We have no interest in squeezing our marketing budget,” Rorsted added, highlighting that it is taking a long-term view on the returns it will get on continued investment.
“We'll continue to probably lead in the marketing spend.
“We have built a brand and we've expanded our top line by almost €7bn. We're taking and expanding our margin line by 500 basis points and expanding our marketing spend by 150 to 200 basis points because we believe it's the right thing to do.
“We're in a good position in our market share standpoint and that's why of course we'll be prudent, but we're not going to short-term optimize on something for one or two quarters to make things look prettier that will then jeopardize our position in 2021 and 2022. I want to be very clear on this. We'll sign the right contracts if that opportunity comes in. We'll build the right products under the assumption that the market will return to normal.”
China losses could hit €1bn
Despite the apparent confidence in business' ability to carry on as normal, it is none the less trying to mitigate disruption caused by the coronavirus and the ripple effect from poor sales in China where it has been worst hit. Internally, it has put a dedicated task force team in place to manage internal concerns, which has already seen it close offices in China and restrict international travel globally, as well as a team to manage the "spill out" of China's sales woes on the rest of the company.
At the beginning of 2020, shortly before the outbreak, Adidas’ Greater China business performed stronger than it’s historically seen which put it in a stronger than expected position to deal with the fall out which came shortly after. Between Chinese New Year and end of February revenues were approximately down 80% year-over-year. Since the beginning of March, it’s started to see a “slight improvement” as stores and warehouses reopen.
It warned Q1 revenues in China could be as much as €1bn less than the year prior while operating profit could be up to €500m lower. The only “spill over” it’s seen is in Japan and South Korea where it warned to expect a “negative business impact” in both regions.
As such, it has started to effectively manage the business in two halves; China and the rest of the world and how to “defend” the rest of the company from the lost sales.
“In total, we expect our Q1 net sales to be down between €0.9bn and €1.1bn combined across China down €0.8bn to €1bn and Japan and South Korea €0.1bn. At the same time, the rest of the world is expected to grow 6% to 8%, which will partially offset the decline in APAC. As a result, we currently expect total net sales to be down more than €700m in the first quarter.”
The company’s direct-to-consumer business, which it has been developing for the past three years, should help it mitigate some of these headwinds, said the chief executive, as he painted a picture of cautious optimism that the businesses’ performance for 2020 will not be fundamentally altered because of the coronavirus.
“We're seeing the direct-to-consumer relationship accelerating; we're talking about storytelling and leveraging firsthand consumer insights. We have made a dramatic change in our direct-to-consumer business in the last three years, which will benefit us not only during the crisis but also the years to come. And the sporting events will continue to be a global stage where frequent opportunities to make our assets and brands and product shine.”