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Adidas link up with Reebok
Feature: 3/8/2005

Image is everything in the battle of the trainers

Lightweight running shoes or bouncy basketball boots? High-tech fibres or traditional tweeds?

For German sporting goods firm adidas-Salomon, it doesn’t matter quite so much following its move to buy US rival Reebok. The world's second-biggest maker of sport shoes and clothing is looking to challenge Nike, the swoosh-branded giant at the top of the industry.

Behind the €3.1 billion (£2.1 billion) bid is an admirable ambition, but analysts worry that adidas may struggle to plug the holes in its business.

"Adidas just doesn't have the traction to go it alone in the US”, says Gavin Finlayson, an analyst at Commerzbank Corporate and Markets in Frankfurt. "It has been stuck on the sidelines in the US over the past few years as it doesn't have the clout of Nike”.

Following the takeover, adidas will have a 28 percent share of the world's sporting goods market, not far off Nike's 31 percent slice.

Complementary deal
But joining forces with Reebok will give adidas more power to negotiate with retailers in the US and push for better positioning and promotion. Outside of North America the picture is rosier, with analysts saying that the deal complements adidas's strengths in Europe and Asia.

It would allow the company to develop Reebok's Asian business – the company also has been making inroads into India and China – and strike better deals with producers.

In the tight-margin world of shoe retailing these can prove to be valuable weapons, analysts said. However, they are not enough to top the tree and question marks have been raised over the amount of cost-cutting that can be achieved and plans to finance the bid by taking on large amounts of debt and issuing new shares.

Key to any challenge on Nike – and just as important as pricing power and distribution networks – will be image.

Gonzalo Basilico is a 12-year-old who loves his trainers. He has six pairs – one Reebok and the rest Nike – and uses them for football, basketball and going out.

Gonzalo has a very clear idea about which shoe brands he likes and why. Adidas is seen as being good quality and comfortable, while Reebok is "cool". Nike, however, manages to have a foot in both camps.

Fashion and colour
"I like adidas, but I still prefer Nike for the fashion, colours, combinations”, he says. "It's all Nike at school. Everyone talks about Nike, no one talks about the others”.

Nick Liddell, a director of brand valuation at consultancy Interbrand, warned that merging with Reebok might only exacerbate adidas's problems.

While adidas has a strong performance sportswear brand – under the motto "Impossible is Nothing" – this is not carried through as powerfully into its Originals clothing range, despite endorsements from stars such as Missy Elliot.

Reebok seems to have concentrated more on positioning itself as a hip clothing maker, Mr Liddell explains. Nike, on the other hand, has a very focused brand, which is based on sporting excellence and product innovation, Mr Liddell says.

That has a trickle down, or halo, effect on Nike's other sporting goods and helps it to sell products as lifestyle choices by linking up with people such as Lance Armstrong and tackling issues such as testicular cancer.

Schizophrenic approach
"Sportswear and urban life wear are closely linked”, Mr Liddell says, adding that adidas and Reebok are more "schizophrenic" in their approach.

"Focus will be absolutely crucial in determining how adidas and Reebok do in coming years”, he comments. "As long as they can take the two brands and drive them into two separate areas where they don't cannibalise each other, but complement each other, then it could be a successful strategy”, Mr Liddell argues.

According to Interbrand's most recent report on the value of global brands, Nike was ranked at number 30, up one place from the year earlier. Adidas came in at number 71, while Reebok did not feature in the top 100.

Should the adidas bid get shareholder and regulatory approval, then the two firms will have to work hard to change many people's preconceptions.

Based on an article by Ben Richardson for BBC Business News.
Author: John Gibbon
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