Introduction
In the United States, the sporting goods industry experienced market growth of around 1.4 percent between 2001 and 2002 from $7.29 billion to $7.4 billion respectively (Gieras 3). The said growth of sporting goods industry was attributed to the growth of market size of men and children, 3.7% and 2.8% respectively, which are the main market segment of sporting goods industry. In the United States, sporting goods industry experienced a growth rate of around 2.7% in 2006, which is relatively lower compared to the previous year. In other words, at present, the sporting goods industry in the United States is experiencing slowing growth rate primarily due to the seasonal nature of US market triggered by changing consumption pattern of American consumers, holiday season, and ‘back to school’ season. Furthermore, another reason for the said slowing down of sporting goods industry’s growth in the United States would be due to the market saturation, triggered by tight market competition, that is presently happening in the American domestic market that forces many footwear manufacturers to shift the focus of their operation to international market.
In order to solve the issue on tight market competition, aside from diverting the focus of operation to international market, would be for companies to merge with one another to expand their market share, improve their profit, outperformed their common competitor, brand development, utilization of competitive advantages of one another, and for achieving sustainable development in the market (Zain 1). Through the said strategy, merging companies can attain better market stance with a corresponding market expansion and less competition. In addition to this, if the resulting merging company will be large enough to dominate the market, then, there is the possibility for them to control the price and supply in the market leading to sustainable development and impressive growth.
It is due to tight market competition posed by Nike and other market players in the sporting goods industry that forced Adidas and Reebok to merge with one another to utilize each other’s competitive advantage and have enough chance of competing at par with Nike – the top manufacturer of sporting goods in the market. Aside from utilizing each other respective competitive advantages, one of the main reasons of Adidas for merging with Reebok was to enhance its market position in the United States. Adidas is a German based country and being considered to be the leading sports goods manufacturer in the European Region while Nike dominates the American Region. With Reebok being one of the top manufacturers of sporting goods in the American market next to Nike; it was a good choice for Adidas to utilize Reebok’s market position to successfully penetrate the American domestic market. The present market share of Nike in the American market is around 40 percent while Adidas and Reebok have 9 percent and 9.2 percent respectively. Though the combined market share of Adidas and Reebok is still less than to that of Nike’s, but it is still enough to shake the market dominance and pose threat to Nike.
Many market analysts and investors believes that the merging of Adidas and Reebok would only caused instability on both companies in the short run period as both companies pass their adjustment period. The difference between the corporate culture of Adidas and Reebok, Adidas runs its operation through the use of technology and performance while Reebok drives its operation by sales and marketing, will provide a hard time for their merging to work efficiently and effectively during the first few years of its operation (Reuters 1). But in the long run, the merging of Adidas and Reebok is being expected to surpass the market performance of Nike. With the combined resources of Adidas and Reebok, they will have a greater grip of European and American market in the next couple of years.
Background Information
Competitive Market of Sporting Goods Industry
The sporting goods industry of United States, compared to other countries, is presently undergoing substantial change as tight market competition, market saturation, and economic condition affects the performance of the entire industry. With the further development of computer technology, to some extent, the sporting goods industry was able to improve its industry performance as it able to use the internet and other e-commerce to boost its sales and provide stronger link between the sports goods manufacturers and sport goods retailers (“Sporting and athletic goods, not elsewhere classified.” 1). In 2003, significant improvement on the retail market of sporting goods was experienced in the United States which provided enough room for sporting goods manufacturers such as Nike, Adidas, Reebok and Puma to regain from the adverse effects of tight competition and market saturation. Sporting goods retailers plays a vital role to the sporting goods industry for it serves as one of the distribution channels of sporting goods manufacturers. In the early 2000’s, the number of sporting goods retailers in the American market increased by 2.9 percent making a total sales of around 1.7 billion USD. There are around 20,000 sporting goods retailing companies operating in the United States with combined annual revenue of $25 billion; athletic footwear and clothing are jointly accounted to 25 percent of the said annual revenue of sporting goods retailing companies (“Sporting Goods Sales Statistics – Outdoor Retail Sales.” 1). Furthermore, the market size of sporting goods industry continues to grow in the American market as men and children market segment recorded market size growth of 3.7% and 2.8% respectively during the early 2000’s. Though seasonal factors adversely affects the competitiveness of sporting goods’ market, but with the development of sporting goods retailing industry plus the technological advantages of sporting goods manufacturers, they were still able to maintain double digit increases on athletic outdoor and sport sandals product categories.
History of Adidas AG
After returning from World War I, Adolf “Adi” Dassler – a German and founder of Adidas, started to produce his own sports shoes in his mother’s wash kitchen. By 1924, Adi Dassler’s brother, Rudolf Dassler, joined his business which started the establishment of Gebrüder Dassler Schuhfabrik “Dassler Brothers Shoe Factory” which successful hit its target market and sold 200,000 pairs of shoes each year before the start of World War II (“Adidas’ History” 1). Though, by 1948, the Dassler brothers did not get on well which led Rudolf to form Puma while Adolf formed Adidas. Adolf Dassler registered his business in August 1949 with a company name of Adidas AG with a retronym of “All Day I Dream about Sports” and three stripes as its official logo. Adidas was able to build its name in the market by sponsoring athletes in Olympics and become well known in the international market. During the 1954 World Cup, Adidas to sponsor the German soccer team which won the said tournament. After seeing all the players of West Germany soccer team wearing Adidas’ black boots, people from all over the world started contacting Adolf Dassler and wants to sell Adidas shoes to their own countries (Barrett 1). The said 1954 World Cup served as the turning point of Adidas and become a well known athletic footwear manufacturer to many countries across the globe.
History of Nike
Nike was founded on January 1964 by University of Oregon’s track athlete Phil Knight and Bill Bowerman, Knight’s coach, with an original name of Blue Ribbon Sports. Blue Ribbon Sports was initially operated as a distributor of Onitsuka Tiger, a Japanese shoe maker, and makes most of its sales during track meets using Knight’s car (“History: Nike’s Heritage.” 1). With the fast growth of Blue Ribbon Sports in the American market, it was able to open its first retail store in Pico Boulevard in Sta. Monica, California by 1966. In 1971, the business relationship of Blue Ribbon Sports and Onitsuka Tiger come to an end and it forced Blue Ribbon Sports to launch its own line of footwear. The first shoe of Blue Ribbon Sports to carry the Swoosh design was a soccer cleat named “Nike” which was released to the public during the summer of 1971. By February 1972, Blue Ribbon Sports introduced its first line of Nike shoes in the market, named after the Greek goddess of victory. Blue Ribbon Sports Inc officially changed its name to Nike Inc by 1978. With a successful product development and marketing strategies, Nike was able to reach its 50% market share of athletic shoe market of United States by 1980 and went public at the end of the said year.
Big 4 Rival Structure
Nike dominates the American sporting goods industry by producing stylish and high quality athletic shoes, apparel, sports equipment, and accessories in the market. With a market capital of $16.4 billion and employing 30,200 workers, Nike has been able to maintain its status for being the top sporting goods manufacturer and outperformed market players in the said industry, e.g. Adidas, Reebok and Puma. On the other hand, aside from Nike, another major market player of sporting goods industry of United States would be the German based company Adidas AG. Adidas boast itself for producing footwear through using technologically advanced machineries and skilled workers. In other words, the competitive advantage of Adidas lies on its technologically advanced machineries and skilled workers. Furthermore, Adidas produces sportswear, footwear and accessories in the market and presently has a strong hold on the European market. Reebok, alternatively, is known for its successful and unique sales and marketing strategies which serves as an avenue for it to have a better market stance in the sporting goods industry. In other words, Reebok has the competitive advantage over Nike and other market players in the United States in terms of sales and marketing strategies; it also produces the same product lines of Adidas. The last but not the least major sporting goods manufacturer would be Puma, which produces sportswear, footwear, and sports equipment and vehicles in the domestic market of United States. Puma boast it self for producing “athleisure” shoes which combines the athletics and leisure style of shoes primarily to attract fashionable customers.
The Sporting Goods Industry
Market Share and Pricing
During the first quarter of 2004, the total market share of Nike in the sporting goods industry already reached to 40% which is 1% higher compared to its market share in 2000 equal to 39% (“Adidas Industry Analysis.” 1). The said improvement on the market share of Nike is being attributed by many market analysts to the successful advertisements of Nike that uses well known athletes and sports idols to endorse their product lines. In terms of prices in the market, generally, Nike sports products are a lot more expensive compared to its competitors specifically to Adidas.
On the other hand, Adidas has around 9.2% of the total market share of sporting goods in the United States during the first quarter of 2004 which is 5.9% lower compared to its market share in 2000 equal to 15.1%. The said down turn on the market share of Adidas in the American market was caused by the slowing growth of American market and tight market competition. In terms of prices, generally, Adidas sports products are relatively cheaper compared to Nike but a bit expensive compared to Reebok.
Reebok, alternatively, has a market share equal to 9% during the first quarter of 2004 which is relatively lower, lower by 3.2%, compared to its market share in 2000 which was equal to 12.2%. Again, just like the case of Adidas, the main factor for the said deterioration of Reebok’s market share was attributed to the slowing growth of the American market and tight competition as Nike continues to dominate the sporting goods industry of United States. In terms of price, generally, Reebok offers the cheapest sports products in the market compared to Puma, Nike, and Adidas. Providing cheaper products in the market is just one of the many marketing and sales strategies of Reebok in order to gain better market position in the United States.
With regards to the market share of Puma in the sporting industry of United States, Puma has 1.1% percent market share during the first quarter of 2004, which is 0.3% lower compared to its market share in 2000 equal to 1.4% (Stevenson 1). The main reason behind the deterioration of Puma’s market share, aside from the slowing growth of American market and tight competition, would be due to the fact that it only concentrated to a limited market segment and product line. The price of Puma’s sport products in the market, in general, is relatively expensive compared to Reebok but cheaper compared to Adidas and Nike.
Oligopoly Behavior
There are some instances wherein threats for new market entrants in the sporting goods industry put Nike, Adidas, Reebok, and Puma into a situation wherein they have to collaborate with one another and utilize their market share in order to prevent the emergence of a given new market players. Nike, Adidas, Reebok, and Puma can control their costs and perform cut throat competition wherein they start lowering the prices of their products in the market in order to attract more customers on their side leaving emerging competitors in the industry with fewer available customers. Emerging competitors oftentimes does not have enough financial capabilities to also lower the prices of their products in the market as much as Nike, Adidas, Reebok, and Puma could do. At the end of the day, with fewer customers and financially vulnerable, new market entrants usually end up bankrupt after these top players of sporting goods industry collude with one another. By the time there will be no threat from emerging competitors; Nike, Adidas, Reebok, and Puma will now set their prices back to its original level before the entry of new market players. Nike, Adidas, Reebok, and Puma perform cut throat competition secretly since the federal government prohibits such act for it impedes market competition and harms consumers in the long run.
Increasing Advertising as a Barrier to Entry
Aside from using cut throat competition in order to prevent the entry of new market players to sporting goods industry, Nike, Adidas, Reebok, and Puma increases their advertising activities in order to put emerging competitors behind their shadows. In the sporting goods industry, advertising is vital for it intensifies bran loyalty of customers in the market. Since emerging competitors do not have enough financial capabilities to hire athletes and sports icons to endorse their products as much as Nike, Adidas, Reebok, and Puma could do, then, there is a great possibility of new market players to experience lower sales and profits. Nike, Adidas, Reebok, and Puma allotted significant amounts of their resources to advertising activities in order to maintain the popularity of their product lines in the market. Furthermore, oftentimes, those companies that has been able to launch striking advertisements on different forms of media experiences higher sales and profits in the market since it is only through advertising where manufacturers can emphasize the uniqueness, differences, and advantages of their products over their competitors. Olympics and World Tournaments are just some of the strategic venues being used by Nike, Adidas, Reebok, and Puma to introduce and launch their new product lines. Sponsoring one team in the Olympics or any World Tournament is already a good chance to advertise product lines in a larger scale and in front of the potential customers in the market. Since sponsoring is too expensive for new market players in the market be able to sponsor one team in the Olympics or any World Tournament, there is a less possibility for them to become successful in the sporting goods industry regardless whether in Europe or in United States.
In this regard, increasing advertisements and cut throat competition are just some of the many ways by which oligopolists: Nike, Adidas, Reebok, and Puma can prevent emerging competitors to gain better market position in sporting goods industry, thereby making the status of barriers to entry on sporting goods industry of United States become high.
The Merger
Merger History
During the Athens Olympics last 2004, Adidas-Solomon CEO Herbert Hainer and Reebok’s CEO Paul Fireman, accidentally met each other. They had a cup of coffee and discussed about their business, about the market, and their position in the United States vis-à-vis their main competitor – Nike. By November 2004 Paul Fireman invited Herbert Hainer over lunch to discuss the merger of Adidas and Reebok for them to improve their market performance and have enough margins to compete at par with Nike (O’Connell 1). In August 2005, Adidas-Solomon officially announced to the public their plan of acquiring Reebok for worth $3.8 billion (Petrecca 1). By the end of 2005, the deal between Reebok and Adidas was yet to be approved as Reebok’s shareholders and anti-trust authorities reviewed the background and potential market effects of the said merger. By January 25, 2006, the European Commission approved the $3.1 billion takeover of Reebok by Adidas and created the second biggest sports goods firm in the international market (“EU Approves Adidas-Reebok Merger.” 1). And on January 31, 2006, Adidas officially closed the acquisition of Reebok International Ltd making the global athletic footwear, apparel, and hardware markets of Adidas worth $11.8 billion (“Adidas Reebok Merger Case Study.” 1).
Motives of Adidas and Reebok for Merger
One of the motives of the said merger of Reebok and Adidas would be for Adidas to enhance its market position in the United States. By merging with Reebok, Adidas can utilize the competitive advantage of Reebok in the marketing and sales aspects of operation in the sporting goods industry in United States over Nike (Richardson 1). Furthermore, with the combined market share of Adidas and Nike, around 20% of the total sporting goods industry, Adidas and Reebok can now have enough market force to compete at par with Nike, with 40% market share (Elliott 1). Though at their present condition, the Adidas-Reebok merging will pose a small threat to Nike, but in the long run, many market analysts and shareholders of both Adidas and Reebok, they will be able to have sustainable competitive advantage over Nike after both companies already adjusted to the corporate cultures of one another. Moreover, the merger will be utilized by Reebok by using the technology and patterns for improving the skills of their workers and used it to further develop its product lines especially the women’s wear, and fitness and aerobic sportswear. In other words, the merging of Adidas and Reebok give way for the rise of a sporting goods firm with a competitive advantage on sales, marketing, skilled workers, and technology. Aside from this, the merging of Adidas and Reebok gave way for the booming of their sales and profitability as they combine their market segments from sports minded down to fashionable consumers in the American market.
Effects of Adidas-Reebok Merger on Competition and Welfare
On the perspective of Adidas and Reebok, their merging will result to a lesser market competition between them since they will now start working hand in hand in order to attain their respective goals and objectives in the market. They can now have more resources to compete with Nike and other sporting goods firms in the American market (Walberg 1). On the other hand, based from the point of view of Nike and other sporting goods firms operating in the American market, competition will become tighter as Adidas-Reebok merging can pose enough threat for Nike and others to secure their market status and performance (Talcott 1). With the fusion of Adidas and Reebok’s market share, it can now adversely affect the stability of other market players in the sporting goods industry considering the resulting sporting goods firm of the said merging has competitive advantage on sales, marketing, performance, and technology, resulting to the shifting of customers on the side of Adidas-Reebok. As for the effect of Adidas-Reebok merging on the welfare of consumers in the market, its overall effects depend on how Nike and the rest of the sporting goods industry market players will respond on the merging of Adidas and Reebok. The merging will cause welfare improvement on the part of consumers as Nike and other market players starts operating efficiently – lowering their prices and improve the quality of their products to attract more customers to attract more customers on their sides as market competition becomes tighter. The adverse effects of Adidas-Reebok merging will be discussed on the next part of this paper.
The Collusive Behavior
Antitrust Issue
One of the antitrust issue that Adidas-Reebok merger would be the potential market collusion, or the formation of cartel, of the remaining market players in the American sporting goods industry in order to turn down the competitive advantage of Adidas-Reebok merging. Both the European Union and United States government were at first skeptical about the market effects of Adidas-Reebok merging since the acquisition will give both companies a total of 25% global market share compared to the 33% global market share of Nike and 6.8% global market share of Puma. With the significant threat that Adidas-Reebok can impose on major market players of sporting goods industry not only in the United States but also in the international market, there is a high probability that the remaining sporting goods firms, especially those with relatively smaller market share, will collude and make under the table negotiations to outperform the competitive advantages of Adidas-Reebok merger to protect their interests. If there will be a collusion between the remaining sporting goods firms, the merging of Adidas-Reebok will pose an adverse effect on the welfare of consumers in the market since the said collusion will exploit the vulnerable condition of consumers in the market. But the antitrust regulators in United States and European Union was not concerned about the actual conduct as much as predicting the future conduct of existing mergers in the market, they also do not have enough evidences to prove that merger will facilitate the likelihood of collusion among the remaining competitors in the market that is why the European Union allowed the merging of Adidas and Reebok.
Existence of Market Power
As already mentioned above, the merging of Adidas and Reebok does not only provide greater market share on both companies on the domestic market of United States but also in the international market. The resulting sporting goods firm of Adidas-Reebok merging can almost be considered as large as Nike in the global market considering that the margin of their market shares was trimmed down to 8%. Furthermore, the resulting company of Adidas-Reebok merger has enough financial stability to pay its debts and current liabilities as Reebok acquires the ability of Adidas to pay short term and long term debts. This can be utilized by Adidas-Reebok Company to expand its operation and develop its product lines through borrowing funds from various financial institutions. Moreover, Adidas-Reebok merging is now starting to move its way towards establishing market dominance on the leisure and lifestyle brand of sports products in the market by allowing Reebok to concentrate on rock, music, and technology –came from the side of Adidas. Whereas, Adidas will focus more on superior technology and performance to gain market dominance athletics and sports footwear, plus establishing part of its presence to leisure and lifestyle brand of sports products.
The Synergetic Effect
Methods of Achieving Effective Collusion
One way for Adidas and Reebok to achieve effective collusion would be for them to integrate their respective competitive advantages on one another to improve their productivity and product quality. Reebok must lend its hand to Adidas in improving its marketing and sales strategies while Adidas will provide guidance for Reebok to improve its performance and technology. With this, Reebok and Adidas will be able to utilize their collusion and gain better market position in the sporting industry of United States.
Furthermore, another way by which Reebok and Adidas can achieve effective collusion would be to implement diversity related programs considering their difference in terms of corporate culture and work force diversity. Corporate values of Germans are very much different from the corporate values of Americans. If left untreated, this might serve as the source of workforce instabilities and mismanagement on both sides of the company as their workers and employees will now have to collaborate and work with each other as a team.
Moreover, it is also a must for Reebok and Adidas to act as a “monopolist” in the market. Meaning, if Reebok decided to increase its prices in the market to increase its profit, Adidas must also take corresponding price increase in order to support the said action of Reebok because if not, Reebok will suffer from tremendous amount of sales and profit loss as fewer consumer will buy its products and shifts to either Nike or other market players. Since Adidas and Reebok have enough market shares to force other market players in the sporting goods industry to also increase or decrease their products in the market, it would be now easier for Adidas and Reebok to act as a monopolist in the market.
Scheme to Divide Markets
One way by which Adidas and Reebok can divide the market would be through determining where their product lines are inclined to. Adidas’ product lines are more inclined to athletics and sports apparel and footwear; therefore, it would be best for Adidas to concentrate more on targeting men and children market segment that are include to sports activities. This will provide Adidas to further penetrate the said market segment through the aid of Reeboks marketing and sales strategies. On the other hand, since Reebok’s product lines are more inclined to lifestyle and fashionable category of sports products in the market, it would be better for the said company to concentrate more on targeting women and fashion minded market segment. Through the aid of Adidas’ technology and performance, Reebok will now have enough room to further develop the designs and styles of their product lines through applying technology and high performances on manufacturing the products.
Performance after the Merger
On March 2006, Adidas announced that its profit increased by 26%, to around $636 million but the said profit growth was not attributed to the merging with Reebok. Furthermore, Reebok was the primary cause for a 3.6 percentage-point dip in Adidas-Reebok’s gross margin, to 44.6%. In addition to this, Reebok brand sales fell by 9% to 3.3 million in 2006 while sales of Adidas rose by 14% to 10 million (Holmes & Norton 1). Due to this unsatisfying performance of Reebok on the Adidas-Reebok merging, Herbert Hainer plans to get Reebok back to its growth track through repositioning its brand to widen its appeal to the market (“Adidas-Never give up on an aging champ.” 1). Though it will take time before the reposition of Reeboks brand to provide positive effects on Adidas’ performance, Herbert Hainer is willing to spend significant amount of resources and time to improve the condition of Reebok in the sporting goods industry.
On the fourth quarter of 2007, Adidas reported its net income rose to €21 million from €13 million on the previous year. Furthermore, sales increased to €2.4 billion compared to €2.4 billion a year earlier. Due to this, the total earnings of Adidas for 2007 were €551 million which is 14% higher compared to its earnings in 2006 equal to €483 million. Reebok, on the other hand, recorded sales worth €2.3 billion which is 1 billion lower compared on 2006, equal to 3.3 billion (“Is the Adidas Reebok Merger Working?” 1).
Just like what most market analysts suspected, the early years of Adidas-Reebok merging will only cause instabilities to both companies in terms of sales and revenue as the differences of both firms start to arise and adversely affect their overall operation in the market. But despite of the present bad performance of Adidas-Reebok merging, many still believe that in the few years to come, the said merging of two major sporting goods’ companies will provide benefits to one another and pose enough threat on Nike’s market dominance.
Conclusion
The Prospect of the Merger
In this regard, the real effect of Adidas-Reebok merging can only be revealed in the long run. As of now, Adidas and Reebok do not have enough market capabilities to utilize their merging and compete at par with Nike due to the instabilities that Reebok must face first before allowing Adidas to have greater profit and sales volume.
The Remaining Issues of Integration
Since the merging of Adidas and Reebok is still on its initial stage, its effect on whether it will lead to the formation of cartel of Nike and the remaining sporting goods market players is still a big question for many consumers and market analysts.
Efficiencies of the Industry followed by the Merger
After the merger of Adidas and Reebok, major improvements on the pricing level of sports products in the American market started to arise, leading to the welfare improvement of the sporting goods consumers. Furthermore, quality of Adidas’ and Reebok’s products also improved significantly which forced Nike and the rest of the market players of sporting goods industry to also improve the quality of their product lines to attract more customers on their side. Therefore, at present, the merging of Adidas and Reebok provides positive impacts on the welfare of consumers in the market.
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