Sports Business

Adidas' Reebok purchase gives it extra muscle in China:

August 29, 2005

Adidas' $3.8 billion purchase of Reebok International will help the companies open more stores and compete against Nike Inc. for leadership in China, the world's fastestgrowing athletic gear market.

"We are growing faster in China than Nike and together with Reebok we are bigger," Adidas CEO Herbert Hainer said. "We can offer our full organization in China to help Reebok build stores."

Germany-based Adidas and Massachusetts-based Reebok announced their merger in early August. The companies haven't disclosed what the pairing will mean for Reebok's 600,000-square-foot operation off Post Road, which makes licensed sports apparel and employs 1,000 people.

Adidas, the No. 2 athletic-shoe and apparel maker, and larger rival Nike are opening locations in China ahead of the 2008 Olympic Games, which is expected to accelerate demand for sports gear.

Adidas' 1,300 sales locations in China, compared with 2,000 for Nike, will benefit from Reebok's endorsement pact with Houston Rockets center Yao Ming of the National Basketball Association.

"Everybody's got their eye on the China prize," said Paul Spindler, who helps manage $2.5 billion at Pittsford, N.Y.-based Clover Capital Management. "Nike has a head start. Adidas would like to be larger as the China opportunity unfolds."

Nike's estimates suggest it will maintain its lead in China after the merger. Nike said it has 30 percent of the Chinese athletic market, trailed by Adidas' 19 percent. The inclusion of Reebok will catapult Adidas'share to 27 percent, according to Oregon-based Nike.

Nike spokesman Alan Marks declined requests for executive interviews.

Nike and Adidas both have subsidiaries in China and operate stores with local partners. Reebok sells its wares through distributors, which means it doesn't have direct control of its business.

"Reebok will be introduced to these retailers that are now selling Adidas products," said Mark Josefson, a Germany-based analyst. "With Adidas behind them, they get a better chance of accelerating."

The purchase of Reebok may also allow Adidas to reduce costs and consolidate buying between the two brands.

Adidas said it expects to save $150 million over the next three years after the deal closes. If Adidas is successful in achieving cost efficiencies, it'll be in a better position to compete with Nike, said Bob Rodriguez of First Pacific Advisors, Reebok's sixthlargest shareholder.

"Sourcing is a natural combination," Reebok CEO Paul Fireman said. "It doesn't mean there will be less factories for shoes, it just means less administrative stuff."

Adidas doesn't expect to move research and development for either company closer to its factories in China, Hainer said. There are risks involved in bringing trade secrets so near other companies operating in China, he said.

Annual footwear and apparel spending by the "urban wealthy" in China is expected to surge 58 percent to $24.2 billion in 2008 from $15.3 billion last year, Merrill Lynch analyst Virginia Genereux wrote in an October report to clients.

In China, there are 400 million youths, five times the number in the United States, Nike said. China's 50 million middle-class households are expected to surge to 150 million in 10 years, Roland Wolfram, Nike's head of Asia Pacific, said in a June meeting with investors and analysts.

"This is where the growth in the top line and bottom line for these companies would come from," Harvard Business School professor Tarun Khanna said. "The demographics of Europe and the U.S. are further along. It's a place where a lot of young people are coming to the buying population."

China is Nike's fastest-growing market in Asia and the second-largest in the region after Japan. Asia alone is Nike's fastestgrowing region.

Asia regional sales last year rose 18 percent to $1.9 billion, Nike said. Nike's sales in China have more than tripled over the last two years. The country probably had sales of $275 million in the year ended May 31, wrote Merrill's Genereux.

"It's the biggest growth market in the world," Nike's Wolfram said.

Nike's sales locations are in more than 250 cities as it opens them at a rate of 1.5 a day. Nike, which sold its first pair of sneakers in Beijing in 1982, also is applying for a retail license that would give it the option to set up the equivalent of Niketowns in China without a local partner.

Adidas, which said its sales in China have doubled the past two calendar years, plans to open 40 shops a month, more than tripling its sales locations to 4,000 in 400 cities by 2008.

Reebok had $35 million in sales last year, according to Shanghai-based sports branding firm Zou Marketing, which was founded by former Nike executives. Its clients include Reebok.

With Reebok, Adidas adds 7-foot-5-inch Shanghai native Yao Ming to its marketing efforts. He signed with Reebok to a multiyear contract in 2003 after his agreement with Nike ended.
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