When Adidas ended its lucrative partnership with Kanye West in October after a global outcry over his anti-Semitic remarks, former managers felt they had finally been vindicated.
Top staff had warned internally for years that the German sportswear group was over-reliant on the Yeezy trainers franchise it ran with the US rapper and fashion designer also known as Ye.
“Behind the scenes, things with Ye were bad already for a long time,” one former manager told the Financial Times. “He was constantly misbehaving — changing his mind, postponing projects, not respecting Adidas timelines.”
But when longstanding Puma boss Björn Gulden steps up to the top job at Adidas next month, he will inherit from Kasper Rørsted a company in crisis whose shares have plunged 54 per cent in a year.
Ye’s departure, a move set to erase half the group’s 2022 earnings that was announced alongside a third profit warning in four months, came on the back of two other shocks — a sales plunge in China and its withdrawal from Russia, another important Adidas market.
“We have lost three profit pools in one year,” said one senior manager.
Some Adidas alumni, meanwhile, claim the company’s problems have been exacerbated by poor decision-making and a toxic leadership culture.
In interviews with 17 current and former executives, many of those who have left the company said Rørsted and his board had positioned Adidas poorly to weather the storm, firing key personnel and becoming over-reliant on the Yeezy cash cow. They also claimed the outgoing chief’s “management by fear” had traumatised staff and led to an exodus of talent.
Most of those still with the company, however, defended Rørsted’s tenure, attributing the problems to unprecedented external shocks. Rørsted declined to comment.
Passing the baton
The day last month of the appointment of Gulden, a 57-year-old Norwegian former professional footballer who engineered a spectacular turnround at Puma, Adidas shares jumped 20 per cent.
But with the stock still trading at a six-year low, well below the darkest days of the pandemic, he is taking over one of the worst-performing European blue-chip companies.
“A whole Adidas brand reset is probably needed,” Citi analyst Thomas Chauvet wrote last month in a note to clients.
It was partly Puma’s performance that cost Rørsted his job, according to people familiar with the supervisory board’s thinking. Since the start of the pandemic, Puma and Nike shares have significantly outperformed Adidas.
In the months before his departure, Adidas chair Thomas Rabe repeatedly confronted Rørsted over the company’s poor total return. Eventually, he was no longer convinced by Rørsted’s defence that Adidas’s woes stemmed from its higher exposure than Nike and Puma to China and Russia.
Some insiders say it was clear Adidas had problems with its product line as early as 2019.
“If we are honest to ourselves, even pre-Covid we did not have the growth we had wished for,” one senior manager told the FT, adding that top management had not fully identified the reasons behind the slowdown. “Had we known it, we would have fixed it.”
Several senior Adidas insiders pointed out that cyclical ups and downs have long been a defining factor of the sporting goods industry.
But for Ingo Speich, head of corporate governance at German asset manager and 0.8 per cent Adidas stakeholder Deka, such swings point to leadership failings.
“In the long run, the global sporting goods sector is growing about twice as fast as GDP,” he said, noting that Adidas had failed to turn that trend into stable profit growth. “This is telling and says a lot about the management’s quality.”
Yeezy was one Adidas franchise unaffected by the 2019 slowdown. “It was the only product moving,” said one person with direct knowledge of the matter.
Adidas rejects this, stressing that it was generating double-digit growth in categories such as fitness and basketball. It also told the FT that Yeezy, like all partnerships, was frequently reviewed in a formal risk management process.
That year Adidas doubled down on the brand, which at the time only accounted for about 3 per cent of sales, ramping up marketing, expanding the trainer collection and boosting supply in markets such as South America and the Middle East.
It was already clear that Ye exposed the group to reputational risk — West had issued a public apology in 2018 for saying 400 years of slavery “sound like a choice”.
By late 2022 lavishly profitable Yeezy had almost doubled in size, contributing €1.7bn in annual revenue, about 7 per cent of the group total. However, Adidas did not disclose those figures to investors at the time.
“They did not give us enough of an indication of how big it was and how important it was to growth,” one analyst told the FT. “Probably, they didn’t want to highlight how reliant they’ve become on the brand.”
Senior Adidas figures argue that the group did try to address this, launching new partnerships with celebrities including Beyoncé, Jerry Lorenzo and Pharrell Williams.
“We want to build a portfolio of influencers,” said one senior executive.
However, none of the new partnerships has come close to Yeezy’s commercial success.
Adidas is now sitting on unsold Yeezy shoes worth more than €500mn in potential revenue and is scrambling to find ways to sell them under its own brand to avoid a painful impairment.
Russia and China
The Yeezy debacle capped an already turbulent period for the company.
After the invasion of Ukraine this year Adidas decided to stop doing business in Russia, a country where it had long been the market leader that generated more than €500mn in annual sales.
It suffered an even bigger blow from a sales slump in China, where annual revenues had doubled to €5bn in the four years to 2019, with a huge operating profit margin of 30 per cent.
Early last year Adidas was caught up in a consumer backlash against western brands that refused to buy cotton from the Xinjiang region amid concerns about forced labour and other human rights violations. Since then Chinese celebrities have shunned partnerships with the company, which has shed market share to domestic rivals.
Lockdowns have further hit China sales, which analysts expect to be just €3bn this year.
Rørsted’s allies say there was little the company could have done to prevent the boycotts or lockdowns. But according to Deutsche Bank analyst Adam Cochrane, some of the current woes “were created by the company”, which “possibly did not manage some of the external factors to the best of its ability”.
Another problem has been a failure to retain top staff. Since 2019 at least 10 of the company’s 20-strong core leadership group have left.
“When you have turnover of this scale, it shows how broken things are,” said one former manager.
Some attribute the churn to Rørsted’s management style, which even some loyalists admit was at times “authoritarian”, and which his critics say stifled creativity and critical thinking.
One former executive described internal discussions “driven by a fear culture”. Another recalled how their team would “spend hours of pre-alignment to make sure how to communicate so Kasper wouldn’t attack the board. It was unhealthy. We couldn’t have an honest conversation.”
Some spoke of being “Kaspered” by an angry Rørsted during meetings. One said there were “almost unofficial counselling groups of people who would get in touch after it happened to them”.
Another recounted an incident when, after he disagreed with Rørsted during a meeting, the chief asked everyone else to leave the room before “yelling at me with a very angry face, calling me all sorts of names, making me feel I am the worst thing in the professional world . . . It was a power play. Everyone could hear what he was saying outside.”
But one manager said that while Rørsted occasionally asked people to leave meetings, it was not to intimidate people but to protect them and keep sensitive topics such as hiring and promotion confidential.
Another said that in several years of working closely with Rørsted they had never witnessed an emotional outbreak. “Kasper was always very direct in his feedback but I always experienced him as very factual,” the person said, in views echoed by two more senior executives.
Adidas told the FT that while it regretted individuals felt there was a problematic management style, it did not “accept this opinion”, stressing that anonymous staff surveys indicated no broader dissatisfaction. “On the contrary, they show that Adidas is a good employer”, the company said.
When Rørsted joined in 2016 from German consumer goods and chemicals conglomerate Henkel, hopes were high. He had made a name boosting efficiency, with the operating profit margin at the maker of Persil detergent, Dial soap and Loctite super glue rising 50 per cent as shareholder payouts and the stock price more than tripled.
He arrived at Adidas with a mandate to cut costs and improve profitability. Initially bumper earnings affirmed Rørsted’s reputation, with sales soaring more than 40 per cent to €23.6bn by 2019, while both operating profit and the dividend more than doubled. A longstanding shortfall in profitability compared with Nike, which for years had been eking out an operating margin of 11-13 per cent, seemed all but closed.
By early 2020 Rørsted had created €40bn in additional stock market value after a tripling in the Adidas share price. The group invested heavily in IT and ecommerce during his tenure, ramping up online sales sevenfold to €5bn a year. In the five years to 2020, Adidas spent €14bn on marketing and €3bn on capital expenditure, up 40 per cent on the previous five years. Rørsted also pushed margin-rich sales through Adidas retail stores and unravelled the ill-fated 2006 acquisition of Reebok.
Internally, Rørsted has been accused of excessively cutting the budget for research and development, which fell 30 per cent to €130mn during his tenure.
The share of revenue generated by products younger than 12 months, a crucial metric reflecting its innovation team’s recent performance, fell from 81 per cent to 67 per cent between 2015 and 2020. It then stopped disclosing the figure.
“From a governance point of view, this is highly critical,” said Deka’s Speich.
Adidas told the FT changes in its annual report were done for “editorial reasons” and did not reflect strategic decisions. Senior executives say the fall in the reported R&D budget was an accounting quirk as the company had outsourced some tasks to suppliers.
They also point to recent successes including the Adizero shoe popular among elite marathon runners, and the Adidas match ball for the football World Cup in Qatar, with its “connected ball” technology that provides data for the video assistant referee.
Some also note that the group’s annual marketing budget has for years been about 12 per cent of annual sales, against about 8 per cent at Nike.
“We did continue to invest [in marketing] and will do so in future,” one told the FT, adding that the problem in its marketing was not resources but efficiency.
The Gulden era
Insiders say Gulden needs to shake up the executive board of six top leaders and bolster investment in the creative team to make product lines that can start to fill the gaping hole left by Yeezy.
A pragmatic no-nonsense manager, he will bring a deep understanding of how to run a premium sports brand.
In an interview with the FT in 2019, Gulden explained how he often slept on the floor of Asian shoe factories in the 1990s while scouting for local suppliers and that even as Puma chief, he would visit the sample room, chat with designers and offer his own ideas. “Fortunately,” he said, “they don’t do everything that I suggest.”
“It’s fair to say he went to a very different business school than Kasper,” said Cochrane, adding that Gulden’s “hands-on energy” was precisely what Adidas needed right now. “The whole company, the belief in what they’re doing and what they’re selling, needs to be reinvigorated.”