The other shoe drops at Nike and Adidas

Some of the greatest assets of Nike and Adidas also happen to be potential liabilities. Photo: Reuters
Some of the greatest assets of Nike and Adidas also happen to be potential liabilities. Photo: Reuters

Summary

  • Kyrie Irving and Kanye West presented similar crises for the sneaker giants. Why were the companies’ responses so different?

Two rivals face similar crises at the same time. They react in very different ways that reveal a great deal about themselves.

This is what happened to Nike Inc. and Adidas AG over the past few weeks as the sneaker giants found themselves at the center of dueling case studies in corporate behavior. Adidas severed ties with the musician Kanye West after a series of anti-Semitic outbursts, and then Nike suspended its deal with the basketball star Kyrie Irving after his own repeated failures to disavow anti-Semitism.

The outcomes looked almost identical. The process wasn’t. The responses to their predicaments actually had as little in common as swooshes and stripes.

The companies diverged in their strategies for handling controversial business partners because of a big disparity in the corporate footprint of Adidas and Nike’s popular sneakers.

Mr. West became worth so much to the company’s bottom line that Adidas hesitated to end his contract and relented only after weeks of pressure. Mr. Irving’s lucrative brand meant so little to Nike that it could afford to cancel his next shoe one day after he apologized. That simple contrast helps explain how they made their decisions.

Adidas depended on Mr. West, while Nike didn’t need Mr. Irving. That simple contrast in basic risk management helps explain how they made their decisions.

Adidas declined to comment beyond previous statements. Nike didn’t respond to requests for comment.

A strange thing about both Nike and Adidas is that the very celebrities they pay to endorse their products can be found among the risks the companies disclose to their investors. Some of their greatest assets also happen to be potential liabilities.

Adidas’s most recent annual report warns that “the company is exposed to a multitude of business partner risks" through its relationships with athletes and creative partners, which is a legally acceptable way of saying they are humans, and humans are unpredictable. But the company assured investors that it spreads that risk across many people “to reduce the dependency on the success and popularity of a few individual partners."

This might as well be called the Kanye rule. Adidas defied it. The company doesn’t break out Yeezy sales figures, but analysts estimate he was single-handedly responsible for around 8% of Adidas’s $21 billion annual revenue.

So it was suboptimal when he posted to Instagram a mock newspaper front page in September faking the death of Adidas’s then-chief executive, Kasper Rorsted, who is alive. And when he wrote on Twitter in early October that he would “go death con 3 ON JEWISH PEOPLE" as he bragged in a podcast interview about his anti-Semitism.

Adidas put its relationship with Mr. West “under review," but it took several weeks for the German company to drop him. This struck many as several weeks too long.

“A thorough review of our partnership was necessary before taking definitive actions," said Adidas finance chief Harm Ohlmeyer, who declined to elaborate during a conference call Wednesday discussing earnings.

That partnership with the performer who goes by Ye formally began in 2016. My colleagues at The Wall Street Journal have reported that Adidas manufactures the products and owns the designs, and Mr. West earned 15% royalties for sales of the Yeezy collection, which featured $200 sneakers with comfortable profit margins. The company recently hailed it as “one of the most successful collaborations in our industry’s history."

The tremendous success turned out to be an even more tremendous problem. Adidas forecasts a decline in net income up to about $250 million this quarter solely because of the breakup with Mr. West.

Picking up the pieces of the divorce is a top priority for Adidas’s new CEO. Bjørn Guldenwas hired this week from Puma to replace Mr. Rorsted, who accelerated his timeline for stepping down, as Adidas executives laid out their plans to salvage the losses.

Adidas will begin selling new products based on the Yeezy designs it controls, but they will be sold under a different name and the company is still figuring out what to do with the line’s existing inventory. Plenty of questions remain about whether they can separate the Yeezys from Ye—if a rebranding can polish the shoes or if they are forever scuffed.

The cautionary tale of Adidas is helpful context for understanding how Nike built the line of Kyries without making Mr. Irving bigger than the business.

His brand of sneakers is among Nike’s top basketball sellers, as the variety of styles is attractive to kids and the roughly $120 price appeals to their parents. The combination of availability and affordability make Kyries the footwear equivalent of a generic drug. “They’re not as much attached to Kyrie himself as the price point and performance of the product," said Matt Halfhill, the founder of the sneaker news site Nice Kicks.

To put it another way, Kyries are no Yeezys. The shoe having more allure than the name of the shoe is why it wasn’t as difficult for Nike to sideline Mr. Irving. The company had the diversified resources to bench one of its most valuable players and barely notice.

Adidas struggled to dump a star. Nike could just do it.

“Nike is dominant in basketball shoes," said Morningstar analyst David Swartz, “and losing Kyrie Irving would not change that."

Of course, a suspension is not a termination, and it’s unclear how Nike plans to proceed with Mr. Irving’s line from here.

The closest that Nike comes to relying on a single person as much as Adidas banked on Mr. West is the company’s long history with Michael Jordan. But they’re hardly comparable. The retired basketball legend has a brand that printed $5 billion last year, when Nike reported $44.5 billion in revenue, and what Mr. Jordan does not have is a combustible presence on social media. He’s as polarizing as free pizza.

Nike, like Adidas, says in filings that its risks include statements or actions that “harm the reputations" of endorsers and lead to “negative perception with respect to these individuals." That would be one way to describe Mr. Irving’s past few weeks.

After he tweeted a link to a movie that promoted false conspiracies about Jews, Mr. Irving had multiple opportunities to disavow anti-Semitism. He declined. He also refused to apologize. And he said the Holocaust was “an event that means something to a large group of people that suffered something that could have been avoided." (You know things have gone wrong if a public figure is attempting to define the Holocaust.)

The only comment from Nike at that point was a bland statement condemning anti-Semitism without naming anyone specific. Then it went silent. The company wasn’t quite sprinting to distance itself from Mr. Irving.

That soon changed. Hours after the Brooklyn Nets suspended him last week, Mr. Irving finally said he was sorry. At that moment, Nike could have tried putting the controversy behind them, moving along as if nothing had happened. Instead, the company suspended the deal and canceled the launch of Mr. Irving’s next sneaker, which was scheduled for release this month.

The other shoe haddropped first.

One takeaway from these case studies with dark symmetry is that it won’t be the last time the companies have to answer for unfortunate comments from their influencers. What cultural icons blare from the megaphones of fame has always been a vulnerability of the industry. But the business model itself has become a bigger source of risk for Nike and Adidas now that celebrities have direct access to devoted followings.

“You never know what’s going to come out of their social-media feeds or mouths," said Cowen analyst John Kernan.

Another thing nobody knows is when Mr. Irving might see the court again. He must satisfy a series of remedial measures before he can return from his suspension, but he could be working next week when the Nets play the Trail Blazers in Portland, Ore.

There would be few places more fitting for Mr. Irving to lace up his sneakers. It happens to be right down the road from Nike headquarters.

This story has been published from a wire agency feed without modifications to the text

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
more

topics

MINT SPECIALS