"The one store that is open in the world is e-comm" - adidas CEO Kaspar Rorsted on how COVID-19 is accelerating a pivot to D2C

Sportswear firm adidas has long been held up as an exemplar of successful digital transformation in retail. As far back as 2017, CEO Kaspar Rorsted said that he wanted adidas’ digital sales to reach €4 billion annually by 2020, up from €1 billion seen in 2016:

It's clear that the consumer is moving online and the importance of online will be immensely important moving forward. We still believe there is tremendous opportunity ahead of us to ensure that we build the right digital franchise for our consumers to address…[and are] making the first minor steps towards our target of €4 billion in 2020.

Different world

Flash forward to 2020 and life is very different to the way it could have been imagined three years ago with the COVID-19 outbreak creating a global retail crisis. Rorsted acknowledges:

We are living in unprecedented times, not only around the globe, but also for sport and for adidas…Currently, there are no sporting events. All sporting events have been postponed …events like Euro, the Olympics or tournaments in the different countries, local runs are all put on hold at this stage. And 60% of our businesses have [been at a] standstill since mid-March. That means 60% of our business is completely closed. Stores are only open in a few countries and more than 70% of our global stores are still closed. The only consistent store that’s open 24/7 and it’s important than ever is of course, adidas.com or Reebok.com.

That means that adidas’s early commitment to digital has proved to be a savvy one and that the original 2020 target needs updating, says Rorsted:

There is no doubt that the one store that is open in the world is e-comm and we’ve been using that very strategically, not only in the last six weeks, but basically since 2016. We originally had a target of approximately €4 billion for 2020. Despite the effect where we have a meltdown of the global trading environment, we have now raised the target to beyond…$4 billion. What we have done is, we have reallocated resources across the organization, whether it’s technical resources, marketing resources or sales resources, to ensure that we accelerate the growth that we had originally expected.

There’s a ramp up in that growth already evident, he adds. E-commerce revenues for the past three months as a whole was averaging around 35% year-on-year, but that saw a hefty uptick in March as the pandemic hit Western economies, topping 55% year-on-year, while April has seen triple digit levels.

In common with other retailers, adidas has had to take some urgent actions to adjust its operational model in the current crisis. This includes ensuring that its workforce of more than 40,000 employees is able to work from home, while ensuring that its immediate and extended supply chains stay up:

We are prioritizing our in-house supply chain and reallocating inventory to e-comm, meaning that in the past we would have inventory that was reserved for our wholesale orders that has now been reallocated and, of course, making sure that our e-comm business can get access to all our inventory.

It’s the overall resource reallocation to e-commerce that stands out. Rorsted elaborates:

We have done a fairly extreme shift of resources towards digital, not only products and money resources, but also people resources from within our organization, where we are taking IT resources and have allocated them to speed up our development of our digital platforms. We have built sufficient financial flexibility within our company [to do this].

He adds:

We are looking fine and using e-comm as a mitigation to minimize impact of the potential disruption….Of course, we will not be able to subsidize the business we will be losing completely in our bricks-and-mortar. But what we are doing, we are dramatically accelerating our e-comm business and also for the long-term, moving into a multi-direct-to-consumer (D2C)-focused set up.

China crisis

Last month, John Donahoe, CEO of rival NIKE, talked about how his firm was developing a playbook for recovery from its experiences in China as stores there began to re-open:

In addition to Greater China, we've applied that playbook in Japan and South Korea over the past two months, and we're seeing early momentum in those markets as well. And with COVID-19 now spreading across Europe and the US, we are applying the same playbook.

At present, adidas derives around 23% of total sales from China and Rorsted has the same philosophy as his counterpart at NIKE:

We are seeing the retail businesses recovering since stores opening in March, [with] traffic and conversion trends normalizing over time. But there will be low normal rates, so even when traffic goes up, conversion still remains lower…It’s clear that when the stores have been empty four, six, eight or maybe ten weeks and consumers have been up in the store, it takes a while to get people back into the store and convert.

Again, the digital D2C side of the business has come to the fore, says Rorsted, with triple digit year-on-year growth in April to date:

We [saw] e-commerce business impacted during February, but [it] recovered much quicker, driven by aggressive doubling down in digital channels. We see the same in other markets  - when a market closes down, it also brings initially the digital channel down and that then recovers after a couple of weeks. [So] we build a successful strategy to revitalize the retail after the end of the confinement period, creating brand moments and campaigns to drive traffic and conversion.

After lockdown

As to life after lockdown, Rorsted is looking beyond the immediate crisis to what happens next - “We are focused so much on the Coronavirus that sometimes we forget that we actually have a normal company to run.” - with a three stage recovery plan built around  “managing the storm, coming out of the storm and managing the new normal.”

Managing the storm involves getting the balance sheet under control, ensuring operational flexibility in the supply chain and the financial flexibility to go after the digital opportunities and ramped up growth Rorsted is betting on.

The ‘coming out of the storm’ phase will involve understanding how post-crisis preferences and shopping behaviors will impact the firm’s business in the future, which Rorsted believes is where digital and the D2C model will help. This second phase will involve re-opening stores, he says:  In Europe, select stores have begun to open with 40 due to be up and running by the end of this month and initial US store re-openings pencilled in for mid-May. Attention will focus close to home for adidas, he predicts:

I think what you [will see] in the weeks to come, [one of the most important moments is] going to be the opening up of Germany, which is the first major country outside Asia that is opening up and you [will see] a slow sequential opening up of retail environments. Depending on the learnings from this, I am certain that many countries would draw their own conclusions and make decisions.

Finally, ‘managing the new normal’ will involve coming to terms with the realities of the retail world after the crisis has abated and understanding what has changed. There is one broad idea that Rorsted has already in this context:

We believe that health and sport will become even more important to the consumers moving forward. I believe there are few people globally who have not thought about their own health almost on a daily basis in the last six to eight weeks. So the move towards a more health and exercise-oriented global population has been accelerated through Coronavirus, maybe not in the short-term, but definitely in the medium-term and in the long term

That being so, adidas will be well-placed if its current ongoing transition to a new operating model continues, Rorsted argues. To that end:

There is no doubt that the acceleration we are seeing right now towards a more digital and D2C—led company is getting a huge support compared to a normal set up.

My take

Another example of a retailer that did the digital spade work early. That doesn’t guarantee all will be well - this week the firm turned in a profit collapse of 97% year-on-year and, as Rorsted pointed out, the shift to digital won’t just balance out offline shortfall - but it should  position the firm better to make the necessary transition to the new world order.