Adidas to Ramp up Spending on Marketing

Case Type: improve profitability; branding, marketing.
Consulting Firm: Deloitte Consulting first round full time job interview.
Industry Coverage: apparel, clothing, textiles.

Case Interview Question #01359: Your client Adidas Athletics, Inc. is an American multinational athletic shoe manufacturer headquartered in the Boston, Massachusetts area. It is one of the world’s major sports footwear and apparel manufacturers. Adidas maintains a major manufacturing presence in the United States, as well as in Germany for the European market, where they produce some of their most popular models. As of 2018, Adidas is the third largest athletic shoe manufacturer in the United States based on revenues, after Nike and New Balance.

Adidas, the number-three athletic shoe manufacturer in the U.S., has hired your consulting firm. The CEO of Adidas wants you to help determine why its profits are declining while the profits of its two biggest competitors, Nike and New Balance, are growing. Where do you start?

Possible Answers:

This is a good solid “declining profit” type of case questions. The interviewer wants to see whether you have an understanding of basic profitability relationships (profits = revenues – costs) and whether you can push through the problem in a structured manner. This case could be asked of undergrad, MBA, or advanced degree candidates.

Let’s think through this problem again. Right off the bat the interviewer has told you that the client’s profits are declining. So the best place to start is by showing your mastery of the basic profit equation: profit = revenues – costs. Pick one factor and start there. Don’t forget that the interviewer just sets up the case; it’s up to you to ask the probing questions. A good interviewee will start by asking general questions and then getting more specific.

Interviewer: So, where do you start?

Candidate: OK, we know that profit = revenues – costs. If profits are down, that’s got to be a function of either revenues decreasing or costs increasing.

Interviewer: Yes, that’s right.

Candidate: Let’s focus on the cost side first: are the client’s costs in line with those of its competitors? For example, are their manufacturing costs similar? Do they manufacture and assemble in low-cost offshore locations? What about selling and distribution costs? Is the client spending too much on a dedicated sales force when its competitors use independent reps? What about G&A? Does the client have flashy office space or overpaid executives?

Note: The candidate gets off to a good start by setting up the answer effectively.

The revenues – costs = profits equation is simple, but it provides a clear way to proceed through the problem. It lets your interviewer know that you understand a basic business relationship and that you have a plan for rooting out the answer. In addition, the candidate is asking good questions – at least half the battle in consulting is knowing what questions to ask.

Interviewer: Those are all good questions. But the client’s costs all seem to be in line with those of its competitors. Costs don’t seem to be the problem here. What would you look at next?

Candidate: If the cost side isn’t the problem, then I would look at revenues next. Are sales declining?

Note: The candidate takes the hint and moves on to revenues.

Interviewer: Actually, yes, revenue is down 6% from last year, and projections show another 5% dip for the coming year. How would you go about figuring out why?

Note: A pointed question from the candidate has brought forth more specific information that will help in the consideration of the case. The interviewer’s answer means that the candidate will have to dig yet deeper.

Candidate: I would try break sales apart into its relevant components: are sales of certain shoe models declining disproportionately to others, for example?

Note: The candidate might have talked about the two pieces that make up sales: price and units. However, he chooses to break down the sales picture into different product categories, which is also fine.

Interviewer: Not really, most SKUs (shelf-keeping units equivalent to individual product styles) are actually declining at a similar rate. What would you look at next?

Note: Looks like another dead end. But don’t get depressed – it just means that the interviewer has ruled out another possible explanation and narrowed the candidate’s focus a little further. We’re getting warmer.

Candidate: If it’s not a few laggard shoe designs driving the downturn for this company, and sales are just down overall, it looks more like people have just stopped buying their shoes, period. We need to figure out why. Who are their biggest customers? What’s their target demographic? Are they just not buying Adidas athletic shoes anymore?

Note: Having checked a variety of possibilities, the candidate makes a preliminary hypothesis and proposes some ways to check this insight. Even better, she proposes some next steps for the inquiry.

Interviewer: You’ve hit on the crux of the problem: The company isn’t sure who its customers are anymore. Formerly, its biggest customers were serious athletes interested in high-performance shoes. But the company isn’t sure whether that’s true anymore. That’s one of the biggest pieces of value we provided for the company – we told them who is buying Adidas athletic shoes. How would you go about getting that information?

Note: The interviewer reveals that the candidate has hit on a key piece of the puzzle. Without pausing for breath, the interviewer then checks the candidate’s ability to turn her insight into action as well as her common sense.

Candidate: Well, frankly, I’d go to the shopping mall! I’d stand outside the Foot Locker store and see who’s buying athletic shoes, check what brand they’re buying, and maybe even ask them why. By doing this, I’d be able to see what demographic group was buying the most athletic shoes and whether they were buying our client’s shoes or not. If not, I’d try to draw conclusions as to why not. In short, I’d try to segment the athletic shoe market, and figure out how to target the most attractive customer segments.

Note: The candidate uses a common sense approach here, which is really good. Not only is her idea practical, it would be easy to implement and it would be relatively cheap to do. She also shows that she fully understands what information she needs to collect. Not only would she observe customer behavior, and ask them why, she’d also analyze the findings and try to draw general implications from them. Besides, consultants love going to the mall. Bain’s headquarters is inside Copley Place in Boston!

Interviewer: Well, that’s exactly what we did – we went to the shopping mall. And our field research showed that young adults in the 13- to 24-year-old age group were buying 65% of all the athletic shoes in the market we looked at. That makes them the first priority market segment for our client Adidas.

The next phase of this case is just beginning: we need to put together a plan to target this demographic group specifically. Do you have any ideas?

Note: Now the interviewer is pushing into new territory, trying to see just how far this candidate can take the analysis.

Candidate: Well, it strikes me that the demographic you’ve described is less concerned with high performance (the client company’s current focus, you said), and more concerned with the image of their shoes. Do they look cool? Does Kobe Bryant wear them? That kind of thing. I would recommend putting together a marketing and advertising campaign to really pump up their image in the eyes of the young public.

Note: This comment is based more on the candidate’s intuition and creative thinking, but it shows that she fully grasps the nature of the problem.

Interviewer: That sounds on track with what we’re thinking about. It looks like our final presentation will be exactly one slide long: Answer: Kobe Bryant!

Note: Good job! The candidate sailed through this case interview. On to round two!

Possible Bad Answer:

Interviewer: So, where do you start?

Candidate: Oh, that’s an easy one. Adidas’ profits are declining because no one is buying athletic shoes anymore: the retro look is in, and everyone is wearing Pumas, Converse, and Pony’s. Athletic shoes as you and I know them are out.

Note: Uh-oh! The candidate is starting to wobble! He has jumped right into the fray, proposing explanations without even thinking through the problem. Moreover, he has revealed a dangerous misunderstanding of some important business relationships. Profits don’t necessarily relate to revenues (“no one buying”), and even worse, he hasn’t listened to the case question. The interviewer clearly explained that the profits of the two leading companies in the industry are growing.

Interviewer: Well, actually, why don’t we try to peel the onion here a little bit. Are profits declining because revenues are shrinking or because costs are increasing? What would you want to know to answer that question?

Note: Sweet! Although the interviewer smells trouble, she gives the candidate a gentle nudge in the right direction with the hope that he’s just nervous.

Candidate: Oh, costs! Then their costs are probably too high because they’re spending too much on advertising. Do they have Shaq or T Mac on their commercials? It’s a waste of money. They should definitely cut back their advertising spending.

Note: Again, a look-before-you-leap approach would have been much better. Instead, the candidate plunges right in and careens out of control, throwing up potential solutions without thinking through the problem or the answer. He’s outta there!