Adidas’ high hopes for Russia’s World Cup thwarted by sanctions

Bloomberg

In 1980, the Soviet invasion of Afghanistan led dozens of countries to boycott the Summer Olympics in Moscow. An undaunted Adidas AG still sponsored the USSR’s Olympic team, becoming one of the first global brands well-known behind the Iron Curtain.
This summer’s soccer World Cup should have had the German company cashing in big on its ensuing decades of expansion in host nation Russia.
But another Russian military adventure—this time in Ukraine—damps much of that opportunity.
Vladimir Putin annexed the Crimean Peninsula and invaded other parts of Ukraine’s east in 2014, leading to sanctions that have weakened the ruble and battered Russian consumers and companies. The drop in oil prices from above $100 a barrel has hurt, too. Add it up and the World Cup may end up providing just a small boost for Adidas in the country.
“Russia didn’t develop to the extent people had hoped, due to sanctions and the oil price, two elements far beyond our reach,” Chief Executive Officer Kasper Rorsted said. “You have to have the patience for the long term, but urgency to deal with problems that arise. We don’t wait for miracles.”
The German company with its three-stripe trademark started outfitting various Soviet national teams in the 1960s. After the 1980 Olympics, Adidas spent two decades rising to the No. 1 and No. 2 positions among sporting-goods makers in the country with its Adidas and Reebok brands even as US rival Nike Inc. led globally.
The foray paid off. Sales in Russia grew 50 percent in the first quarter of 2008, when Adidas signed the country’s soccer union to a 10-year sponsorship deal. Sales in Russia more than tripled in eight years to peak at $1.3 billion in the Sochi Winter Olympics year of 2014, about three times what Nike was then selling in the country.
It planned to have 1,200 stores in Russia and neighbouring countries, plastering shops over 159 cities across the region, and ran most distribution itself in a country lacking large multibrand chains like Foot Locker Inc. The country became Adidas’s most profitable after China, with operating margins topping 30 percent.
The tide started to turn in 2013, when Adidas suffered problems transitioning to a new distribution facility and the ruble began to weaken. The Ukraine battles flared the
next year. Adidas responded by closing 500 stores in the region and redirecting marketing spending elsewhere.
Now Adidas in Russia is just a little more than half the size it was in the 2014 heyday, but generates more income from every pair of sneakers sold there than three years ago, when it first started to break out performance in the country.
Strict cost discipline and higher prices should boost Adidas’s Russia margin to 24 percent this year, said Macquarie analyst Andreas Inderst, “a good achievement given the very difficult macroeconomic backdrop.”
That recovery contrasts with other companies’ woes. German food wholesaler Metro AG in April had to slash its profit forecast following a worse-than-feared performance in Russia.