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Adidas Maps Strategy for Reebok

Adidas outlined its plans for Reebok, including beefing up branded apparelofferings, buying back distribution and sharpening its image.

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LONDON — Bigger is meant to be better for the freshly minted Adidas Group.

The German company on Tuesday outlined plans for Reebok, which it acquired this year for $3.8 billion, with a focus on beefing up the branded apparel offerings, buying back distribution and sharpening the brand’s image.

Partly because of the Reebok acquisition, Adidas Group is projecting net income to increase by double-digits for each of the next three years — 20 percent in 2007. In that same span, the group, which has combined sales of $11 billion, also anticipates high-single-digit sales growth.

“I called the Reebok acquisition a ‘once-in-a-lifetime opportunity’ and I hold firm to this statement,” Herbert Hainer, chief executive and chairman of Adidas Group, said during a press conference at the Cumberland Hotel here. “Nothing is going to stop us from turning the opportunity into even greater things for the Adidas Group.”

Hainer didn’t waste any time, announcing that Adidas had replaced Reebok as the official apparel supplier to the National Basketball Association starting with the 2006-07 season. The 11-year global merchandising partnership with the NBA also allows Adidas to design, manufacture and market NBA apparel and footwear in the U.S., Canada, Europe and Asia.

“At first glance, the NBA deal may look like a loss for Reebok, but it’s not,” Hainer said. “It caters to the group on a worldwide level and we now have to look at how we can get the best benefits for the group.”

The major motive for purchasing Reebok was to help Adidas make inroads in the U.S., where Nike still dominates. Industry analysts had speculated that Adidas would take over some of Reebok’s league sponsorships. More than 50 percent of the Reebok business is generated in North America, and the company is known for pioneering lucrative deals with professional sports leagues such as the NBA, the National Football League and the National Hockey League.

Some industry watchers were skeptical Tuesday about new plans for the brand.

“Reebok sales are still down pretty sharply in the U.S.,” said Matt Powell, an athletic industry analyst at Princeton Retail Analysis. “I didn’t hear anything that reassured me that that was going to change. In my opinion, product and marketing need to be changed before sales will start improving. This is a real turnaround situation for Adidas and it’s not going to get fixed in a couple of quarters. It’s going to take a lot of time and energy.”

Hainer said the NBA transfer to Adidas from Reebok has freed up funds that Reebok can now use for other types of sponsorships. For example, Paul Harrington, president and chief executive of Reebok, said the brand had just signed charismatic soccer player Thierry Henry, the champion striker for Arsenal, to be the face of Reebok in Europe. The four-year deal starts Aug. 1 and reflects Reebok’s commitment to back individual players, rather than teams in Europe.

Both Hainer and Harrington said they were dealing with the “short-term” challenges that Reebok faces. Harrington said repositioning Reebok’s music- and classics-themed apparel and footwear business among mall-based retailers, which dented sales last year, would continue to impact revenue for the rear of the year. The overall plan is to streamline the brand’s image to retailers and consumers and to improve its weakest links, namely apparel, which has been a soft spot for years.

Reebok has faced a sales slowdown in the U.S. in recent months largely because of uncertainty about plans for the brand, as well as poor sales in its classic footwear products, which comprise the bulk of revenue. Reebok’s orders at the end of last year were down 22 percent from 2004.

In February, Harrington named Michael Schaeffer, formerly of Puma, to be Reebok’s creative director. He also established two product divisions — sports performance and sports lifestyle — and plans to whittle down Reebok’s logo portfolio to three from more than a dozen. The famous Reebok vector will be used on sports performance merchandise, the RBK initials on sports lifestyle products and the Reebok Classic featuring the Union Jack for the heritage collection that falls under the lifestyle division.

Adidas sees branded apparel as its biggest global growth category and the goal is to have annual sales of 100 million euros, or $121 million at current exchange, by 2009. Harrington said Reebok would upgrade the design and quality, and launch a global apparel range that can be purchased and merchandised regionally.

Hainer said that, until now, Reebok’s branded apparel strategy was off base.

“The approach they had until now was to outsource much of the design and development,” said Hainer, adding that Adidas would apply its “considerable talents” and “design know-how” to the Reebok collections.

Adidas Group is already at work on an in-house design and development structure for Reebok that will support apparel growth. The company is transferring Reebok’s processes, systems, production and delivery calendars to Adidas, and it plans to be ready for spring 2008. Harrington said, however, there were no plans to sign a fashion designer similar to Adidas’ partnership with Stella McCartney.

“We’re just focused on getting the apparel up to the level and quality that consumers would expect of us, and the emphasis will be on sports performance,” he said. “We do plan to leverage our success with Reebok footwear and get our apparel into better department stores, but right now, it’s about building the capability for the apparel business.”

Adidas also plans to buy out Reebok’s distributors and joint venture partners worldwide. Hainer believes owning distribution ensures a consistent position globally and a commitment to the long-term aims of the brand. His first target markets for the Reebok buybacks are Russia, China, Australia and Switzerland, where Adidas already has a strong presence.

Hainer estimated annual revenue gains from Reebok of at least 200 million euros, or $242 million, by 2009. By 2009, Adidas Group plans to reach 500 million euros, or $605 million, in extra revenue thanks to the deal, and 175 million euros, or $212 million, in cost savings.

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