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Adidas to beat sourcing costs hike by upping efficiency
14
Dec '15
To beat expected significant increases in its underlying sourcing expenses, Adidas Group will continue to work on further increasing its production efficiencies by focusing on four levers.

“These four levers include product and materials, supply base and allocation, level loading as well as productivity improvements,” an Adidas press release said.

At an investor event at its German headquarters, the Adidas management shared details on important drivers of its long-term operational development in general and the expected margin progression in 2016 in particular.

As Adidas sources the vast majority of its products from more than 30 countries around the world, it said its sourcing costs are constantly impacted by both global and local macroeconomic trends.

Ongoing double-digit increases in labour costs in most emerging markets and higher material costs for cotton, nylon and EVA are currently putting upward pressure on future product costs.

As a result, the Group expects a significant increase in its underlying sourcing expenses by 2020 and to counterbalance this headwind, the company will continue to work on further increasing its production efficiencies.

As a globally operating company, the Group is also exposed to exchange rate fluctuations, which is a direct result of its Asian-dominated sourcing activities, which are largely denominated in US dollars, while sales are denominated in other currencies to a large extent.

As a consequence, hedging US dollars is an important part of the company's centralised currency management.

The Group has established a hedging system on a rolling basis up to 24 months in advance, under which the vast majority of the anticipated seasonal purchasing volume is hedged approximately six months prior to the start of a season.

As a result, the company has almost completed its anticipated hedging needs for 2016, expecting Group gross margin to be negatively affected by the unfavourable effects from a stronger US dollar against most major currencies.

In total, higher input costs and unfavourable foreign exchange effects are expected to significantly weigh on the Group's gross margin development in 2016.

However, the company expects to be able to compensate the vast majority of those negative effects, thus limiting the projected gross margin reduction to between 50 and 100 basis points compared to the 2015 level.

In addition to supply chain efficiencies, this will be achieved by significant price increases in several regions, adjusted trade terms with the company's retail partners, over-proportionate growth in higher-margin markets as well as a more favourable category, product and channel mix.

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