http://www.businessweek.com/stories/2005-03-13/adidas-the-machine-of-a-new-sole

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Adidas: The Machine Of A New Sole


Three years ago, a trio of engineers for adidas-Salomon (ADDDY) began toiling away in a windowless boiler-room-turned-secret-workshop beneath downtown Portland, Ore. Their goal: to create the first intelligent running shoe, one that would use an in-sole computer to adjust its heel cushioning in real time according to changes in the running surface. "We knew we would have to rewrite the rules," says Christian DiBenedetto, chief shoe engineer at the North American headquarters of Adidas. "But we knew it would be massive if we could pull it off."

Well, maybe. Even if Adidas can make a reliable computerized shoe, the unknown is whether enough consumers will value the breakthrough. The Adidas 1, a $250 high-tech wonder, hits store shelves this month as a big gamble that the German company can redraw the battle lines between itself and archrivals Nike Inc. (NKE) and Reebok International Ltd. (RBK) Inside the heel of the aerodynamic shoe are a wafer-thin sensor and magnet that monitors the amount of shock applied to the foot and adjusts the footbed 1,000 times per second. Adidas executives believe the shoe could be their iPod, a technology so ready for prime-time that it can be adapted to the company's basketball and soccer shoes and eventually enter the profitable league of "gotta-have" sneakers among urban youth. Says a hopeful Erich Stamminger, CEO of Adidas North America: "This is the biggest thing to hit this industry in decades."

LIMITED RELEASE

But Adidas could just as likely be stepping off a cliff. No one knows if even serious runners are ready to pay $250 for a shoe -- more than 50% above the next most expensive sneaker on the market. Nike Air Jordans, at $150 to $175 a pair, only staged a comeback last year, after two years of sinking sales. Adidas won't divulge its capital investment in Adidas 1. But analysts say production is complicated and that the new sneakers will cost four or five times as much to make as a normal shoe. Because of that, production will be less than 10,000 this year to drive exclusivity and hedge Stamminger's bet.

Adidas is following the example of German luxury auto makers, BMW and Mercedes-Benz. The carmakers introduce expensive technology, like navigation systems, in high-priced models, establish credibility and critical mass, and then push the technology, if it's accepted, into lower priced models.

But shoes aren't cars, and Adidas can't afford a misstep. Outside the U.S. it is the clear rival to Nike, and holds a dominant 35% share of soccer-shoe sales. But the German company slid to No. 3 in the $8.3 billion U.S. branded-athletic-shoe market in the late 1990s, thanks to weak ad campaigns and unfashionable new products. Adidas held a 9.1% share in 2003 and 2004, vs. 12% for Reebok, and 36.4% for a resurgent Nike.

Stamminger, who took over the U.S. division last year, adding to his global marketing title, is making changes that have retailers more interested in Adidas these days. Designs for the U.S. are hatched in Portland now, reversing years of designs that played in Munich and bombed in Missouri. In addition to outbidding rivals for NBA pitchmen Kevin Garnett, Tracy McGrady, and Kwame Brown, he secured exclusive ad rights for the U.S. TV feed of 2006 World Cup Soccer. And Adidas recently signed hot fashionista Stella McCartney to design new lines of sport clothing.

POSITIVE FEEDBACK

Rivals Nike and Reebok have taken notice but are skeptical that Adidas 1 will be another Air Jordan. "We think technology that changes the design of the shoe rather than just the function, like our pump that obsoletes laces, is where the breakthroughs come," says Reebok Chief Marketing Officer Dennis Baldwin. Both rivals are developing their own "smart shoes," though they say they aren't going as far in applying silicon chips to the problem. One pitfall stemming from the hardware is added weight. A size-9 Adidas 1 weighs 15.3 ounces, while most top-end running shoes weigh between 10 and 14 oz. And if anyone obsesses about a few ounces, it's influential consumers in the $4.9 billion running-shoe market.

Nevertheless, Adidas is pumped by nine months of positive buzz that preceded the new shoe's launch. Runner's World gear editor Warren Greene, for example, says Adidas 1 delivered the goods on his extended test. "The overall fit and feel and responsiveness and the ride of the shoe were all positive."

Stamminger delivered a mild rebound in 2004 when Adidas' sales rose 2% last year after two years of flat sales. Now he is projecting sales will grow by 5% to 10% this year and hit double digits next year, thanks in part to Adidas 1. Those are heady expectations for a sneaker priced in territory Michael Jordan couldn't reach, even on his best day.

By Stanley Holmes in Portland, Ore.


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