In The Headlines

Adidas Uses Focus, Speed, and Celebrities to Drive a Comeback

When Angelique Kerber won the U.S. Open in September to bring the women’s tennis title to Germany, she was decked out head-to-toe in gear by Adidas. NFL wide receiver DeAndre Hopkins kicked off the Houston Texans season wearing cleats designed by rapper Kanye West, part of Adidas’s strategy of mixing sports and hip-hop culture that is resonating with kids. Even celebrities such as Katie Holmes and Kristen Stewart lately have been seen sporting Adidas’s back-to-basics Stan Smith tennis sneakers, which some fashionistas have taken to mixing with couture wear. “If a giant hurricane comes tomorrow and wipes out Herzo, the one thing people are going to miss most are our products,” says Eric Liedtke, Adidas’s executive board member responsible for global brands, using company shorthand for Herzogenaurach, the Bavarian enclave where the company is based.

That is quite a turnabout for a company whose stock was Germany’s worst-performing in 2014, after it abandoned its sales forecast and scrapped long-standing profit goals. Yet today, thanks to a recent embrace of e-commerce, strong demand for celebrity-themed gear, and a revival of interest in retro-style shoes, Adidas is red hot. Its stock has more than doubled in the past 12 months, and it is gaining ground on Nike and Under Armour in the crucial U.S. market.
A management reorganization allows divisions ship new styles and colors to retailers more often, bringing the latest variants of the classic Stan Smiths, flashier Kanye-designed Yeezy Boost shoes and running shoe-inspired NMDs to market much faster. Adidas updated the NMD (it stands for “Nomad”) three times in August and six times in September, keeping young customers clamoring for the latest styles—and they are willing to pay full price to snag them before limited quantities disappear from store shelves. “It’s really millennials fueling this resurgence,” says Neil Schwartz, an analyst at SportsOneSource. “It used to be Adidas came out with a shoe and they had only a few styles. Now it’s 31 flavors at Baskin-Robbins.”

Adidas leapfrogged Under Armour to become the second-best-selling sports footwear maker in the U.S. this year through September, Schwartz says, though its share is still about a ninth of leader Nike’s. Adidas says it sold 8 million pairs of Stan Smiths globally last year—out of 50 million over the past four decades. It also sold 15 million pairs of Superstars, the white low-rise basketball shoes immortalized by Kareem Abdul-Jabbar in the 1970s and transformed into hip-hop essentials by rappers Run D.M.C. in the ’80s. “They are gaining market share at the expense of Nike,” says Cédric Rossi, an analyst at investment bank Bryan, Garnier, who notes Adidas’s currency-adjusted sales grew at double Nike’s pace in the spring quarter.

Chief Executive Officer Herbert Hainer, who retired on September 30th, has over the past few years decentralized the company’s marketing, advertising, and research and development. In soccer, a flagship sport associated with Adidas since the 1950s, General Manager Markus Baumann says he now has more control over sales, design, and sponsorship budgets and does not need to tap headquarters staffers to get things done. Prior to his recent retirement, CEO Hainer initiated a move to funnel the marketing budget into six trend-setting cities: New York, Los Angeles, London, Paris, Tokyo, and Shanghai. To support that decision, the strategy also calls for constraining the supply of hot shoes, such as the NMD, to build buzz and ramp up demand. In the coming weeks, for example, new versions of Stan Smiths and Superstars will add Adidas’s bouncy Boost running sole—usually found on its most serious athletic shoes—to help keep interest high in the retro-inspired models. Adidas rethought its sponsorship policy under Hainer as well, downplaying broad league-wide tie-ins, such as the 11-year NBA sponsorship deal that the company ended in 2015. Nowadays, Adidas backs individual players such as NBA star James Harden and European soccer’s Paul Pogba, who are more likely to connect with kids. “It’s the player behind the club who’s influencing the younger generation,” says John Guy, an analyst at brokerage firm MainFirst.

As part of its push to react faster, Adidas introduced a white woven running shoe called Futurecraft in September, knitted by robots in a new factory in Germany. (Most sneakers are made in Asia and then transported by sea, a lengthy process.) A second so-called “speed factory” will open in Atlanta next year. Both facilities will allow limited-run shoes to be produced more quickly and closer to key markets. Adidas also plans to test in-store robots that can assemble shirts to any customer’s exact fit.

The durability of Adidas’s fashion-driven comeback is still unclear. Two-thirds of the company’s growth is coming from its casual Originals and Neo brands, rather than hard-core athletic shoes, according to Citigroup. And fashion can be fickle. Moreover, North America accounted for only 2.4% of 2015 operating profit at Adidas, well below its 16% portion of company sales, according to Bloomberg Industries. The company lags far behind rival Nike in profitability. Ingo Speich, Portfolio Manager at Frankfurt’s Union Investment says, “Nike’s margin is nearly twice as much. That’s not yet solved.” Adidas officials hope that getting new styles to market while they are hot and high-priced can help narrow that gap.

Citations

1. http://bloom.bg/2dkMTpV – BusinessWeek
2. http://bit.ly/2dF4xbf – RetailDive.com

Robo-Pizza: Zume and Others Are Changing Pizza as We Know It

Robots help make the pies at Zume Pizza—but that is not the most whiz-bang aspect of the Mountain View, California startup’s technology. Instead, Zume’s secret sauce, so to speak, is a vibrantly painted truck the size of a FedEx delivery vehicle. Inside are 56 ovens that can quickly heat to 800 degrees to cook pizzas minutes before delivery. “It’s the same experience as having pizza straight from a brick oven,” said Zume CEO Julia Collins, a restaurant veteran who co-founded the company last year with Alex Garden, a former Zynga and Microsoft executive. The patented technology, which includes logistics software to fire up each oven at the right time, is a far cry from Domino’s ballyhooed DXP delivery vehicles, which merely include warming ovens, she said. Despite the automation, Zume is pitching its pies, which range from $15 to $19, as artisanal, packed with fresh, locally sourced, responsibly farmed ingredients.

Pizza is a $40 billion industry in the U.S., “mind-blowingly large,” Collins said. Domino’s, Little Caesars, Pizza Hut, and Papa John’s dominate the market, but there is room for others hungry for a slice. Those huge numbers, along with Collins’ argument that Zume’s technology shaves costs, landed the startup about $10 million in venture capital, although it will not say who funded it.

Zume recently rolled out its first baked-on-the-way truck throughout Mountain View after having won approval from Santa Clara County health regulators. It will have three trucks soon allowing expansion to San Jose by the end of the year, coming to San Francisco and other parts of the Bay Area in the next 18 to 24 months. After perfecting its model here, Zume plans to go nationwide and even global, Collins said. “It’s got a lot going for it,” said Kit Yarrow, a consumer psychologist and author of Decoding the New Consumer Mind: How and Why We Shop and Buy, a book about instant gratification. “We’re in love with technology advances today, rather than skeptical of them. Consumers, especially younger ones, crave excitement in food; they have innovative palates.” But of course, she said, the ultimate factor for success is taste. “The big question mark: Is it really yummy?”

Food industry analyst Phil Lempert, who runs the SupermarketGuru website, said pizza automation isn’t an original idea, citing pizza-making vending machines in Japan and the United Kingdom. The pizza behemoths are also trying to inject technology. Domino’s is testing a pizza-delivery robot named Dru in Australia. Pizza Hut has several patents, some dating back to the 1980s, on built-in ovens in trucks, and it is working in Asia on a robotic cashier named Pepper. Still, according to Lempert, pizza is so popular and has such high margins that it lends itself to experimentation. “Silicon Valley loves food and wants to reinvent it,” he said. “Pizza is fun, so they can try to add some sizzle to it. I think we’ll see a lot more innovation in pizza.”

Might consumers push back against companies using automation because that costs jobs? Lempert said most people realize that hiking the minimum wage to $15 an hour will mean fewer jobs and more automation. The jobs supplanted by the robots tend to be lower-paid work. “Those folks deserve to continue to get skills and resources to progress through their careers,” Zume’s Collins said, adding that Zume sponsors educational opportunities for its line cooks. The company has 18 full-time employees and 32 part-timers, including “pielots,” its name for delivery drivers, who make $17 to $20 an hour. Kitchen workers, mainly part-timers, are led by an Executive Chef who supervises prep cooks making the pizza dough, preparing toppings and adding them to the pies after the pizza robot spreads the sauce. Another robot puts the pies in an oven to partially bake them before they are loaded into the truck. Eventually robots will take on more work. Zume’s labor costs account for 14% of its revenue, about half the industry average of 28%, Collins said. Rent is 3%, compared with a nationwide average of 8%, because the delivery-only model lets it rent space in light industrial zones, much cheaper than retail corridors. Ingredients are a little pricier, coming to about 35% of revenue versus 25% for others.

While the company said baking en route means customers will get their orders faster, if a truck makes 56 stops, one might assume that those at the end of the route will have a pretty long wait. Sophisticated logistics software turns on each oven when the truck is four minutes away from that pizza’s destination. A combination of gas and electricity, fueled by a 50-kilowatt generator, heats for 3.5 minutes, then allows 30 seconds for cooling. At the push of a button, a metal conveyor belt ejects the pie onto a Zume box made out of biodegradable sugarcane fiber. Ridges on the box’s bottom allow air circulation and prevent soggy crusts. The operator cuts the 14-inch pie into eight slices and brings it to the door.

Collins sees Zume in big-picture terms, not just disrupting pizza, but “helping people have access to high-quality foods. Being able to leverage the power of next-generation, highly intelligent robots allows us to put better food onto America’s tables.”

Citations

1. http://n.pr/2dD1tZw – NPR
2. http://bit.ly/2cIUHUP – San Francisco Chronicle

The Good News Is . . .

• The Consumer Confidence Index hit 104.1 in September, the Conference Board said. Economists had expected the Consumer Confidence Index to hit 99.0 in September, down from August’s revised reading of 101.8, according to a Thomson Reuters consensus estimate. A larger share, 27.9% of those surveyed, felt that jobs were plentiful in September, up from 26.8% in the prior month. Those claiming jobs were “hard to get” declined to 21.6%, from 22.8%, the Conference Board said. The survey, a closely followed barometer of consumer attitudes, measures confidence toward business conditions, short-term outlook, personal finances, and jobs.

• Nike, Inc., a leading designer, marketer and distributor of athletic footwear, apparel, equipment, and accessories for sports and fitness activities, reported earnings of $0.73 per share, an increase of 9.0% over year-earlier earnings of $0.67 per share. The firm’s earnings topped the consensus estimate of analysts by $0.17. The company reported revenues of $9.1 billion, a 7.7% increase. Management attributed the results to strong global demand, particularly in China and Western Europe.

• CBOE Holdings, which owns the Chicago Board Options Exchange, where the popular Standard & Poor’s 500-stock index and volatility index options trade, is paying $3.2 billion in cash and stock to acquire Kansas-based Bats Global Markets. The Chicago Board Options Exchange is the largest American options exchange, and Bats is the second-largest stock exchange operator in the United States by volume, behind the New York Stock Exchange. Bats stockholders will receive $10 a share in cash and 0.3201 of a share of CBOE’s common stock. CBOE has been looking for a partner that could expand its scope, and in signing a deal with Bats, it is aiming for more diversification into equities, exchange-traded products, and foreign exchange.

Citation
1. http://bit.ly/1eu7yyH – The Conference Board
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2dI3iV8 – Nike, Inc.
4. http://nyti.ms/2dg5Lu0 – NY Times Dealbook

Planning Tips

Guide to Managed Payout Funds vs. Immediate Annuities

Managed payout funds are mutual funds designed to provide you with a fixed level of monthly income through various strategies. In this regard, they are similar to immediate annuities. One of the key benefits that annuities can provide investors is a guaranteed stream of income for life. But this guarantee comes at a cost, because the investor effectively forfeits control of the money in an annuity in return for the income guarantee. Mutual fund companies have therefore sought to compete with annuities by creating managed payout funds that also provide streams of income, with greater investor control, but are not guaranteed. Both products are designed to produce income, but there are significant differences which are outlined below. Be sure to consult with your financial advisor to determine if managed payout funds are appropriate for your situation.

Variable payouts – Annuity income typically is fixed, while managed payout fund income can rise or fall over time. In fact, the amount of income you receive from your payout fund can vary from month to month, sometimes dramatically, depending on the performance of the financial markets. In addition, annuity income can be guaranteed for life, while managed payout fund income is not guaranteed to last.

Inheritance – If you plan to leave an inheritance, a managed payout fund can be a better choice than an immediate annuity. You can pass on whatever value is left in the payout fund to your beneficiaries. With an immediate annuity, payments typically cease at the end of your life (or your joint beneficiary’s life, depending on who lives longer).

Fees – Managed payout funds typically are less expensive to operate than immediate annuities. By having lower operating expenses, managed payout funds let you keep more of what the fund has earned. That means more money in your pocket to spend on living expenses.

Flexibility – Managed payout funds can give you more flexibility than immediate annuities. If you need to access money in an emergency, you always can sell your shares in a payout fund. In most cases, you cannot withdraw your entire principal from an immediate annuity.

Taxes – Taxes are another issue to consider. An annuity payout will consist of a mix of return of capital and interest which is taxed as ordinary income. The income from a managed payout funds can be a mix of return of principal, interest, dividends, and long and short-term capital gains. Investors may pay tax at different rates on each type of income received.

Citations

1. http://on.wsj.com/2dOUpfu – Wall Street Journal
2. http://usat.ly/2cTEzON – USA Today
3. http://bit.ly/2dzRQu9 – Investopedia
4. http://bit.ly/2d4rAYg – MyRetirementPaycheck.com
5. http://bit.ly/2dzRVOt – Barron’s