Reebok Case Study
Group C
Jennifer Beam, Robin de la Llama, Matt Judd
MGT 4199
April 29, 2006
MGT 4199 Case Study Group C
April 29, 2006 Jennifer Beam
Robin de la Llama
Matt Judd
Table of Contents
Introduction 2
History 2
Strategy & Products 4
Current Situation 7
Corporate Governance 8
External Environment 9
Internal Environment 11
Situation Analysis 13
Review of Mission and Objectives 13
Strategic Alternatives 14
Recommended Strategy 15
Financial Audit 15
Conclusion 19
References 21
Reebok Case Study
Introduction
Reebok International Ltd is headquarters in Canton, Ma. It is a leading worldwide designer, marketer and distributor of sports, fitness and casual footwear, apparel and equipment under Reebok, Rockport, CCM, KOHO, JOFA and Greg Norman brands.
History
Reebok's United Kingdom-based ancestor company was founded to develop shoes to help athletes run faster. The family-owned business proudly made the running shoes worn in the 1924 Summer Games by the athletes celebrated in the film "Chariots of Fire".
In 1958, two grandsons of the founder, J. W. Foster started a companion company named after an African gazelle which became Reebok. In 1979 Paul Fireman, a partner in an outdoor sporting goods distributorship, negotiated for the North American distribution license and introduced three running shoes in the U.S. At $60, they were the most expensive running shoes on the market.
In the beginning of 1981, Reebok introduce a new athletic shoe designed especially for women called Freestyle™. This transformed the athletic footwear industry by encouraging the aerobic exercise movement, the influx of women into sports and exercise and the acceptance of well-designed athletic footwear by adults for street and casual wear. By the end of 1981 Reebok's sales exceeded $1.5 million. The Freestyle is now a "Classic" and is Reebok's best selling athletic shoe of all time.
Creating innovative products that generate excitement in the marketplace has been a central corporate strategy. Reebok launched breakthrough concepts and technologies through out the 1980s and 1990s for a host of sports and fitness such as; The Pump® technology and Step Reebok®, which was introduced 1989 after the company conducted comprehensive scientific and biomechanical research that showed step aerobics was a highly credible and effective format for cardiovascular exercise.
Reebok experienced explosive growth and their performance in aerobic shoes that has progressed through several generations. By 1985 Reebok completed its initial public offering (RBK) and by utilizing a network of independent and Reebok-owned distributors, Reebok focus turned to global market expansion. By the 1990s they entered into the global markets of 170 countries.
In 1992, Reebok began a transition from fitness and exercise into sports. Reebok developed new footwear and apparel products for football, baseball, soccer, track and field and other sports. By 2000, Reebok began developing strategic partnerships with National Football League (NFL), National Basketball Association (NBA), Women’s National Basketball Association (WNBA), National Basketball Development and League Indy Racing League to restructure their consumer products business. The strategic partnerships granted exclusive license to Reebok to manufacture, market and sell licensed merchandise including on-field uniforms, sideline apparel, practice apparel, footwear and branded apparel line for all teams. The agreement also gives Reebok exclusive rights to develop a new line of fitness equipment. By 2005, Reebok had exclusive rights to supply and market all on-court apparel, including uniforms, shooting shirts, warm-ups, authentic and replica jerseys and practice gear for all NFL, NBA, WNBA and NBDL teams and with limited exceptions, to design, manufacture, market and sell headwear, T-shirts, fleece and other apparel products for all teams in most channels of distributions.
Strategy & Products
Reebok also signed numerous professional athletes, teams and federations to sponsorship contracts. Reebok made a strategic commitment to align its brand with a select few of the worlds most talented, exciting and cutting-edge athletes. For several years now, the company has focused on those athletes who represent the top echelon of sports and fitness, among them Allen Iverson and Venus Williams. In November 2001 Reebok and the NBA's MVP, Allen Iverson signed a lifetime contract. Guarantees Iverson remains a Reebok endorsed athlete throughout his professional career.
The Reebok brand focuses on three product lines; RBK, Performance and Classic. RBK features include street footwear, apparel and accessories. RBK is inspired by today's street fashion; its marketing focus is culturally relevant. A global marketing campaign, called the "Sounds & Rhythm of Sport," was launched with television and print ads, consumer and retail promotions, and celebrity events the paired athletes with many of the music industry's edgiest hip-hop and rap artists. The television spots showcase the moves and motion of the athletes, who are energized by the rhythm of the artist's music.
Performance line includes apparel and footwear designed for football, basketball, soccer, tennis, running, fitness and other sports. Reebok’s fan-based licensed apparel continues to perform well in team shops where sales of NFL and NBA products increased by 30% in the last quarter of 2005. Classic line includes footwear and apparel. Classic products have been strength of the Reebok Brand for many years. Although sales of Classic products have slowed down in the U.S. during the last quarter of 2005, Europe sales of both Classic Fusion and Classic Original products continued to be strong. Reebok believes the Classic products will continue to be the strength of the Reebok Brand in the future. Reebok plans to launch a new line of Rbk Classic products later in 2006 and we will be accelerating the rollout of our Classic Fusion products into several key markets, including the U.S.
Reebok’s share of the US athletic shoe market has declined from 20% to the low-teens percentage due to changes in consumer tastes and increased competition from Nike. It does however continue to maintain either first, second or third position in all of its global markets. The June 2004 acquisition of The Hockey Co. with its exclusive licensing agreements with the National Hockey League and the Canadian Hockey League are ultimately expected to strengthen Reebok’s global sports performance brand. Sales for the quarter ending September 2005 we also negatively impacted by the announcement of Reebok’s acquisition by Adidas-Solomon along with and continued integration issues with The Hockey Company. The company is in the process of consolidating multiple warehouses in Canada into its new distribution facility in St. Laurent. The integration has created some startup problems in this new facility and thus caused some difficulty in shipping the current orders. However, Reebok’s management feels that the demand for The Hockey Company's products will increase with the start of the NHL season. The Company reported that its gross margin for the third quarter of 2005 was up 290 basis points from 40.4% in the third quarter of 2004. The greatest improvement in profit margin came from their international markets.
On October 4, 2005 the United States regulatory agencies approved the $3.8 billion acquisition by Adidas – Solomon, which was subsequently approved by the board and their shareholders on January 25, 2006. The acquisition of Reebok will allow Adidas to expand in the US market where it has been traditionally weak. The team to be will be more effect in competing against Nike, the number one leader in the sporting goods market. The business models of two organizations are complementary. In areas were Adidas is weak Reebok is strong. The combination of Adidas and Reebok accelerates the Adidas Group's strategic intent in the global athletic footwear, apparel and hardware markets. The new Group will benefit from a more competitive platform worldwide, well-defined and complementary brand identities, a wider range of products, and an even stronger presence across teams, athletes, events and leagues. The new Group has pro forma aggregate 2004 revenues of $11.1 billion the combined company will be able to offer an enhanced portfolio of global brands that truly addresses the needs of today's and tomorrow's consumers.
Adidas-Salomon Chairman and CEO Herbert Hainer chairman stated that "This is an once-in-a-lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry”. Reebok is expected to advance Adidas position in the sporting goods industry and are improving the overall financial strength of Adidas to drive increased shareholder value.
The combination will enable the Group to generate substantial cost savings as well as incremental revenue and profits from more complete coverage of all consumer segments. Given the solid management teams at both companies, adidas expects to realize the benefits of this transaction quickly and efficiently following the transaction's close. The portfolio will be anchored by two brands with well-defined identities - Adidas, a leader in sports performance with a European heritage, and Reebok, an American leader in sports and lifestyle products based on cutting-edge technology, trend-setting street wear and classic design.
The new Adidas Group is expected to have a stronger presence in American sports and a complete product offering that addresses key sports categories, including soccer, basketball, running, American football, hockey, tennis, training, outdoor and golf.
Adidas expects that the combined Group's strong presence across teams, athletes, events and leagues will enable it to substantially increase the worldwide visibility of its brands.
Current Situation
During 2005, Reebok experienced an overall increase in net sales and net income through the third quarter compared to the same period of 2004. They recorded a net income before taxes of $296.5 million and held total assets of $2,542.8 million. This resulted in a return on investment of 11.66% (Reebok.com). Reebok maintained a market share of 12.2% in the athletic shoe industry, behind Nike with a 36% market share (Business Week.com). Two main ratios used to examine profitability are gross profit margin and earnings per share. Reebok had a gross profit margin of 41.5% for the third quarter end of 2005 compared to 39.9% in 2004. Their earnings per share for the third quarter end of 2005 were $3.33 compared to $2.50 in 2004. Therefore, Reebok overall increased its current performance in 2005 compared to 2004 (Reebok.com).
Reebok is in the global sports and fitness industry. Their purpose is to “ignite a passion for winning, to do the extraordinary, and to capture the customer’s heart and mind.” The company was created because athletes wanted to run faster. One of their main objectives is to provide excellence and innovation in everything they do. Reebok sets very high and exceptional standards for all of their products. They also show a commitment to operate in socially responsible way and support human rights. Reebok conducts business with “high standards of professional conduct, honesty and integrity and in compliance with all applicable laws, rules and regulations.” They use their mission statement and standards of business conduct to guide their business processes (Reebok.com).
Corporate Governance
Reebok currently has ten members sitting on their boards, but can increase to twelve under the current by-laws. The majority of the board, as required by law, consists of external members. The board is required to hold a minimum of 40% of the annual retainer in the form of common stock. They are permitted to take 100% of their compensation in the form of stock, which is publicly traded. The board requires its members to be examined in regards to certain issues that include understanding of the product, international background, diversity, and skills. Members are expected to remain on the board unless certain changes in circumstances occur. Some of these may include retirement or reaching the age of 72. The board has various committees that are involved in all aspects of the company’s operation.
Top management constitutes the executive officers. Some of these include Paul Fireman (CEO), Kenneth Watchmaker (CFO), David Baxter (VP), Suzanne Biszantz, Paul Harrington, and Robert Myers. The majority of officers have worked for the company in other positions. They are required to have knowledge about the company and the skills and background to properly perform in their position. Top management is, therefore, responsible for the company’s performance. Four of the nine members have been in their current position for less than three years. They were all promoted from within. Top management is required to interact directly with the lower-level management and the board of directors. Reebok prides itself in the processes in which its decisions are made, which are socially responsible.
External Environment
There are various forces that affect the corporation and industry. Some of these include economical, technological, political-legal, and sociocultural issues. The economical factors that have affected Reebok are rising energy costs and Hurricanes Katrina and Rita. In response to these events, the US market has become promotional. Even though interest rates are at an all time low, the industry is not greatly affected because of the low cost necessity items. Another economical factor that has affected Reebok was Footlocker’s reduction of inventory. Footlocker announced that they were going to reduce inventory levels, which meant a decrease in sales for Reebok. The technological factors that have affected Reebok are industry research and development spending along with new product designs. In order to compete with Nike, Reebok must spend a great amount on research and development. They must also continue to invent new, unique products to attract the changing styles of consumers. Reebok has just announced a new technology called “Pump Technology”. With this, they envision greater profits and market share. There are not any major political-legal factors that have affected Reebok. If outsourcing regulations or import issues are altered, Reebok will be directly affected. Reebok is also affected by sociocultural factors that include age distribution and lifestyle changes. With the new invention of “Pump Technology”, Reebok is gearing its product toward the younger generation and sports enthusiasts. With the new fad to “get fit”, Reebok has geared advertising toward those who wish to make a lifestyle change by exercising. Other parts of the world are affected by economical, technological, political-legal, and sociocultural issues, but they are composed of different factors.
Industry competition is driven by many forces. These forces include the threat of new entrants, bargaining power of buyers, threat of substitute products, bargaining power of suppliers, and rivalry among competing firms. There is a high threat of new entrants into the market due to the nature of the product. New Balance is a great example of this. The bargaining power of buyers is a medium force. Buyers are willing to pay a premium for shoes that are stylish and performance oriented. However, they will not be willing to pay more than the competitors’ rates. Another high force is the threat of substitute products. With the large variety of manufacturers and styles of shoes, consumers have the ability to buy the similar shoes at a cheaper price. The bargaining power of suppliers is low because there are various suppliers of the raw materials needed to produce the shoes. The rivalry among competing firms is very high because Reebok competes with Nike and other shoe manufacturers to produce the newest styles and performance enhancement. There is always the pressure to invent a new shoe that provides a competitive advantage. The most influential factors that affect Reebok are rivalry among competing firms and the threat of substitute products, which is due to the nature of the industry.