SEPTEMBER 2005 :: BIG BUSINESS

Stripe Force
Adidas Pairs Up With Reebok to Challenge Nike

By Matthew Karnitschnig and Stephanie Kang
Staff Reporters of The Wall Street Journal

On the same day that Adidas opened its new multimillion-dollar store in New York in May, Kenneth Webb walked out of Niketown, a few miles away, with his 40th pair of Nike sneakers.

Mr. Webb, a youth counselor in his mid-20s, rarely plays sports in these shoes, which is one reason he doesn't wear Adidas. "Adidas, it's good for runners ... but not to profile in," he says. "People wear Jordans to look cool."

A pioneer of the sporting-goods industry, Adidas built its reputation on engineering athletic shoes that everyone from Jesse Owens to Muhammad Ali considered the world's finest. But as Nike has come to dominate the global sneaker market over the past two decades, by appealing to both athletes and fashion-conscious consumers, Adidas's serious sportsman's image has turned into its Achilles heel.

Now, Adidas is trying to claw back. Last month, the company agreed to acquire Reebok International for $3.8 billion. If successful, the acquisition will allow Adidas to address a key weakness: its problems marketing products to the sneaker-buying masses.

Adidas has "always made great products," says Ernest Kim, a shoe critic at Sole Collector, a magazine for sneaker aficionados. "Where they dropped the ball was desirability."

'The Bigger the Better'

Adidas's new $250 running shoe comes equipped with small motor and microchip that constantly monitor impact and adjust shock absorption accordingly

Reebok, once associated primarily with the 1980s aerobics boom, has seen more success recently after repositioning itself as a lifestyle brand. Though Reebok boasts endorsements from NBA stars like Yao Ming and Allen Iverson, its emphasis on casual footwear has helped it reclaim shelf space. Recent endorsement deals with rappers 50 Cent and Jay-Z have raised the brand's cachet with the urban trendsetters Adidas has struggled to attract.

The combined company would have more leverage to negotiate contract terms, including shelf-space and discounting practices, with big retail chains such as Foot Locker and Finish Line. While Nike has in the past exhibited enormous influence with those chains, Adidas and Reebok have held far less sway.

"It's all about clout," says John Horan, president of Sporting Goods Intelligence, an athletic-footwear research firm. "In this market, the bigger the better."

The Reebok deal caps a larger offensive by Adidas to restyle itself and take on Nike, especially in the U.S. market. Since last year, the German company has hired Muhammad Ali for a $50 million ad campaign. It has joined with Missy Elliott and Run-DMC for a range of marketing campaigns. It also teamed up with fashion designers Stella McCartney and Yohji Yamamoto for a line of pricey workout clothes and sportswear sold through department stores and fashion boutiques. Some of the merchandise costs more than $100-a price point Nike has long dominated with popular products such as Air Jordan shoes.

Even with the extra boost from Reebok, Adidas's image makeover won't happen overnight. Critics say that Adidas remains an engineering, not marketing, company at heart.

For example, while Nike renames technology with catchwords such as "Shox" or "Air," Adidas sticks to engineering jargon like "A3" to describe a new cushioning device called "adiprene." The feature attraction of its new Manhattan store is a $250 running shoe, equipped with small motor and microchip, which Adidas dubs "the world's first intelligent shoe."

With the marketing hurdles, "It's not easy for us to break into the urban market," Adidas Chief Executive Herbert Hainer acknowledged in an interview in May.

Adidas's challenge is typical for many German companies, from tiny camera maker Leica Camera to engineering giant Siemens, which have long excelled at making consumer products but not at marketing them. For much of the past century, German companies felt that their craftsmanship was so superior that "made in Germany" was the only sales pitch they needed. That false sense of security left companies like Adidas open to assault.

'Where You Have to Be'

One reason Adidas failed to draw young trendsetters was that it was wary of alienating its core audience. That meant it avoided controversial figures like 50 Cent in favor of universally appealing personalities like Mr. Ali. Acquiring Reebok would help broaden its marketing reach.

Penetrating the U.S. market is crucial for Adidas. The U.S. is not only the world's biggest athletic-shoe market, accounting for 50% of the $33 billion spent globally each year on athletic shoes, but also the birthplace of hot trends. Together with Reebok, Adidas will have about 20% of the U.S. market, compared with Nike's 36%. Failure to expand could hamper Adidas's prospects in Asia and threaten its leadership in Europe, where Nike is growing.

"North America is where you have to be," Mr. Hainer said after the acquisition announcement. "Trends in North America tend to have enormous impact on consumer preferences around the world."

Adidas's troubles in the U.S. date back to 1984 when it passed on an opportunity to sign Michael Jordan, then a promising NBA rookie. Adidas had been the first to seek endorsements from major athletes as far back as the 1950s, later adding the likes of Mr. Ali and Kareem Abdul-Jabbar to its roster. But by the 1980s, management believed that sponsoring teams and associations, such as the International Olympic Committee and Federation Internationale de Football Association, the global soccer body, was a more effective marketing tool.

Nike, then still known primarily for jogging shoes, quickly stepped in, offering Mr. Jordan a $2.5 million contract. A year later it launched a $65 basketball shoe called the Air Jordan. Fueled by slick ads that portrayed Mr. Jordan as an almost mythical presence, the Air Jordan was a sensation.

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