You may have heard about the rather dramatic business breakup between Adidas and the rapper and designer Kanye West, who now goes by the name ya Yay, has had no trouble keeping himself in the headlines for all kinds of things, including a torrent of anti Semitic rants that ultimately left Adidas no choice but to sever the multi billion dollar arrangement with him last October.
Bloomberg has learned that Adidas has to sever ties with you.
The rapper formally known as Kanya West now Yea, is facing growing fallout from a recent string of offensive remarks. Adidas or Adidas warns that it may report an operating loss of as much as seven hundred and fifty million dollars this.
Year's partnership the Easy brand that was dissolved in octogra after he'd made some anti Semitic remarks. The Audidas before that point had called it the most successful partnership of its kind in the industry in history.
Adidas now has to find a way to make up for the loss of it's hugely lucrative Yeasy line of shoes.
There's a Yeasy sized hole in their product assortment that they need to figure out how to fill.
And what to do with the piles of yeasy merchandise they've still got on hand.
It's hard to envision a bigger collection of crises hitting a company all at once.
That's Bloomberg reporters Kim Bassin and Tim Love. They've been all over this story for months, and they tell the whole saga in the latest issue of Business Week. I'm West Casova today on the big tag how did this all go so wrong? And can Adidas climb back from it? Kim, Adidas is sitting on a giant pile of money, essentially that they don't have any idea what to do with.
There are millions of pairs of unsold sneakers just sitting around and we've been calling it sneaker purgatory in all these warehouses.
Around the world.
These are Yeasys designed by Kanye West, who now goes by Ya, and since that partnership with Easy collapsed last year, there's now about one point three billion dollars worth of these sneakers just waiting to be sold.
When the partnership was canceled in late October, Adidas had already placed orders for many of these pairs to be produced, and so over the months that followed, the sneakers kept piling in from factories in Asia to Didas's warehouses that are scattered around the world. So it wasn't until about March, five months say, after the whole Yeasy collaboration exploded, that Adidas finally he had all the sneakers ready to go in all of its warehouses, and then it just sat there.
And that's because this deal fell apart in spectacular fashion.
That's correct, it definitely did.
This goes back to last fall where Yay started basically yelling on social media at Adidas executives and it kept spiraling from there. He accused them of stealing his designs, He accused them of profiting off of him inappropriately. He said they weren't allowing him into meetings that he should have been in and he was just being mistreated as their most important business partner. From there, he said he wanted to get out of his deals with Corporate America.
He was done with Adidas, he was done with GAP, he was done with all the big corporations that he had lined up these long term, huge billion dollar agreements with, and it just started to fall apart.
And so the way it fell apart was pretty remarkable too.
I mean, he had all this beef with Adidas, and he brought up beef with his other corporate partners like Gap and some mothers. But then beyond that, he just started ratcheting up just wild behavior and saying highly offensive and toxic things.
And it happens so quickly.
Right, So back in October, I get a phone call in the middle of the night. It's like midnight on a Thursday, I believe, and it's Kanye West and he's calling me to tell me that he wants to get away from corporate America, go out on his own and do everything himself. Like three days later, his lawyers sent a season desists.
To Gap saying they want out of that deal.
It's only like six weeks after that original phone call where all the deals are gone and Adida says it's terminating his partnership.
Kim, can you describe that phone call.
There's a point at the very beginning where Yay asked me if he sounds crazy, and he doesn't. He's answering questions thinking several seconds before he delivers like a bar to answer it, and it seemed quite calculated. He seemed like he was first off, legitimately angry at his business partners and really wanting to do something about it.
I think at the time I didn't fully.
Appreciate that he was going to make two hundred million dollars nearly in royalties off of this Adidas deal last year, and to be willing to just chuck that away was surprising.
This deal between Adidas and Kanye West really was the thing that brought the company back, Is that right, Tim.
Yeah, I think that's fair to say. There were a couple of things going on. But if you go back in time to the twenty twelve twenty thirteen, Adidas was really struggling, particularly in the US. It was just losing market share and it just seemed driftless. And at one time Adidas was like the dominant sports company in the US. Of course, this was before the rise of Nike, and a pivotal figure in that was Michael Jordan, who this kind of just goes to show it. He was a
diehard Adidas fan. He played in Adidas, he wanted to sign with Adidas by you know, early eighties. He's coming out of University North Carolina and these up and comers swashbuckling from Nike. They offer him a deal he couldn't refuse, and Adidas refused to match it. So Jordan went with Nike and the rest is history.
On September fifteenth, Nike created a revolutionary new basketball shoe. On October eighteenth, the NBA threw them out of the game. Fortunately, the NBA can't stop you from wearing them where Jordan's from Nike.
But if you fast forward to twenty fourteen, by that point, Adidas had made a couple of last ditch efforts to try to re catch Nike. They bought reboch in two thousand and six for about almost four billion dollars. Six years after that, they're looking around and you know that hasn't helped, and they're losing business in the US and they didn't have a lot that was generating buzz.
So what do they do? Well.
The first thing is they brought in an American for the first time to head up their global brands. His name is Eric led Key, and he kind of created a team. He'd spent a lot of time in Portland before he came to Germany, and he obviously as an American, he really understands the US and he understands kind of the challenges that Adidas employees.
In the US space. So he set.
Up a team and he empowered a lot of people who really understand the US a lot better than the people who had pre obviously been you.
Know, running the show.
And they set up partnerships with Pharrell, and they introduced, you know, some new products that were getting buzz.
But if you have to go back, the.
One name, the one personality that was just like this relentless, like he himself called himself a son, and he really did have this sort of solar energy that's Kanye West, and he brought it to Adidas, and the sales of the Yeasy would rise and rise, and the profitability were great. But beyond that, he also just kind of created a new energy at the place, I think in credibility for Adidas in the US. So there really was what they call a halo effect for the whole brand.
In the same way that Jordan liked Adidas and not Nike and signed with the other one, Kanye West loved Nike not Adidas. So he dropped a couple shoes in the late two thousands and early twenty ten's The Air Yeasy with Nike.
Thanks to the new Nike Air Easy with the glow and the dark soul, Jimmy can use this as.
A nightlind And the moment he got signed away, it really looked like that Adidas had found something really special. Despite warnings about his behavior and his antics in public, whatever that was, he had something just different in a way to lure people to this product. Every word out of his mouth would be something everyone paid attention to. And this combination of design, product, distribution, operations, and marketing just clicked.
And why did he switch? Why did he leave Nike to go to Adidas when he liked Nike so much?
He left Nike because he wanted royalties and they would not give him royalties on the shoe. So Adidas gave him an offer that he essentially couldn't refuse. It was more autonomy. He could run his own design studio and work with Adidas instead of for them. The idea behind that partnership was that he would get the freedom that he's so so much desired at Nike.
And in the first shoe sold out immediately.
The Yeezy Boost three fifties became like the main line for Yeezy's and those things over the years would just constantly sell out and these limited edition drops and then resold on the secondary market for hired than retail prices. It really made this like sneakerhead economy, along with Jordan's, such a big, big thing that it grew into.
Can you describe for non sneaker heads among our listeners what these shoes look like, what made them special and distinctive?
The three fifties have these nit upper sections and then the Boost technology, which is Adidas's response to Nike's Air on the soul, and they have these ridges on the side. They're comfortable and they just fit with like this kind of street where aesthetic that Kanye helped develop. So beyond that, all these different kinds of easies were sold too. So there's the foam Runner, which looks like this like perforated marshmallow, kind of like a crock.
It's a slipper.
It's super weird, but ugly doesn't necessarily mean bad in the shoe industry. It means distinctive and if you're wearing those, you know exactly what those are. And his styles over the years really resonated with so many people.
After the break, just how much money was Easy worth to Adidas tim how lucrative all told was this deal.
It was always a mystery and everyone wanted to know, and you know, drips and drabs of rumors came out or leaks, but no one had a full read on the situation until October, when Adidas terminated the partnership, and so they had to announce what the financial impact of that was going to be, merely for the fact that they weren't going to be able to sell them for
the remaining two months of twenty twenty two. And with that little shard of information, analysts kind of reverse engineered the economics of it and quickly determined that the profits were somewhere in the vicinity of forty percent to fifty percent of Adidas's profits from the Easy franchise. So from a revenue perspective, they were only about eight percent of Adidas's revenue, but from a profitability standpoint, they were nearly half.
And that just kind of goes to show you that people were willing to pay top dollar for these things. After Adidas canceled the partnership in October, when the Wall Street analysts were parsing the statements and the figures, several of them estimated that the twenty twenty one revenue for Easy was at two billion dollars.
The dependence on Eazy's was super interesting. They have so many other product life. They have these old designs of shoes that have stood the test of decades and decades of time, like the Gazelle and the Samba and the Superstar and Stan Smith. These are legendary shoes, right and they've been re releasing them in different styles over the years and years and years. They come in, they come out of style, and at a certain point, product cycles
just went out of wax. Things weren't working. They made too many stand Smiths, they couldn't sell them, they couldn't get them off the shelves, and the one left standing was the Easy and that was creating excitement for consumers. It was the one portion of their business that was creating all this excitement. In the first year after Kanye re signed his deal with Adidas, it extended ten years
back in twenty sixteen. The first full year after that, Eases did about three hundred million in revenue, and a couple of years later already broke a billion in annual rev It was a big business for them. Beyond that, the shoes themselves were profit drivers. These shoes sell for two hundred dollars retail, and then part of the whole hype cycle that we talk about in the sneaker world is that people aren't just attracted to them because they
want to wear them, they want to resell them. So they buy these two hundred dollars sneakers and resell them for two fifty three hundred, four hundred.
Some of them go crazy.
If you find a pair of the old like Yeezy Duck boots, you can probably sell those for fifteen hundred that kind of thing. The most expensive one ever sold, I believe, was one a prototype version of the Nike Air Yeezys that Kanye himself wore one time, and they they auctioned for like one point eight million.
Once Adidas was really gaining momentum last decade, the middle of last decade, everyone had pretty much given up hope on Adidas ever catching Nike in terms of size, at least in the near term. But a lot of investors wanted Adidas to become as profitable as Nike, and so when Adidas decided to go out and get a new CEO,
they brought in Casper. Worsted, who's a real operations guy, numbers focused and he had had a really hot streak at the German soap maker Hankle, and so he went about optimizing a bit for the back half of last decade. Everything looked just golden at Adidas, and then the pandemic hit and that's when it was a big turning point for Adidas. First thing that happened was in March, Germany went into lockdown and it emerged that Worsted had not wanted to pay rent in Germany at the Adida stores
that were shuttered. This of course caused just rage in Germany. It was front page news and all the tabloids. Then you had the event with the police murder of George Floyd and the protests all over. There were employee protests at Adidas, particularly workers of color who had been complaining that the company did not handle issues, particularly for minority workers,
and so that came to a four. So in March of twenty twenty one, Adidas unveiled its new five year strategy called Own the Game, and within two weeks within China boycott started. There was a huge backlash and boycotts of Western brands who had taken a stand against cotton that was sourced in a part of the country where there's a lot of concern about forced labor and other human rights abuses of the Wigers, and it hit Adidas
very hard. Adidas had been growing very fast in China, and basically overnight the light switch was turned and that just kind of rocked the whole five year plan that Worsted had intricately come up with. So if we enter twenty twenty two, this is where more headaches come. Russia invades Ukraine. Now Russia is a market that Adidas one of the few countries in the world where Adidas has always clobbered Nike. Overnight, the whole Russia market is gone.
And so over the course of last year, Adidas had to put out three or four different profit warnings where they had to lower their financial targets over the course of the year. In the middle of it, the supervisory board finally decided it was time for Casperwarstad to go. They put that out in August. He's going to leave
at some point in twenty twenty three. Kanye West or Yea, pours salt in the wound and he posts very what he seems offensive posts on Instagram a fake New York Times front page that said Caspererwiss dead dead at sixty. Within two weeks of that is when Kanye picks up the phone and calls Kim on my colleague here and starts going on a war against all of his corporate partners.
As you described, Kim Ye calls you and says he's fed up and wants to cancel the deal with Adidas. But Adidas too wasn't so happy with him either.
At first, he wanted to this is a quote from him, He wanted to co parent the sneakers, which means I guess he would design them and they wouldn't deal with each other very much, and Adidas would just sell them.
So then October comes, there's the fashion show where he wears shirts that say white lives matter, which the Anti Defamation League regards as hate speech.
Tonight a firestorm of controversy for Kanye West because of this photo taken at his Paris fashion show. Yay and conservative commentator Candice Owens war shirts with the phrase white lives matter on the back, a phrase activist say is harmful and has been used by white supremacist groups.
And then Kanye starts making these increasingly awful antisemitic remarks.
The company put the relationship under review, and that's a process where they're trying to figure out what exactly to do with this enormous business line that suddenly is toxic.
Well, they finally did decide in October twenty fifth. By that point, the pressure had just gotten so hot. There were boycotts being called for in the US and in Europe against Adidas products, and it's hard to envision a bigger collection of crises hitting a company all at once.
There was a two minute phone call between various members of top management, including Casper Rorstad, the CEO, as they discussed finally what to do about this, And on that day they decided, effective immediately, to sever ties and end the partnership.
Why didn't do you just sever that relationship when he started making these anti semitic remarks.
A couple other companies that dealt with Kanye and had deals with Kanye did drop him. He had worked with Balenciaga, They said they wouldn't work with him again. He had a big deal with Gap to sell apparel, and Gap started to wind down that partnership quite quickly. Adidas fell under lots of criticism for taking so long to sever their ties with him. They never really did address why they didn't sever that relationship sooner. I think it was
mostly about figuring out what to do with all this stuff. Right, there's one point three billion in inventory. You're also trying to figure out how to fill the gaps in your product lines. There's a yeasy sized hole in their product assortment that they need to figure out how to fill. I think, as we've seen, it's taken them seven months to even figure out what to do with the shoes, like these things have been sitting there for so so long.
There are no good answers here. I mean, Adidas will say, look compared to those other companies that he had partnerships with, we had the longest running partnership. We had the biggest partnership. We had so many employees, We have contracts with factories in Asia, we have complex dealings. You can't just turn that off overnight.
When we come back. Adidas moves ahead without easy How did Kanye respond to being cut off from Adidas?
Kanye did not respond super well. There was a day where he went to the Sketcher's headquarters out in California and just barged in there and was like, I want to talk to your executives. It seemed like he didn't think that Adidas would actually end things.
Even though he was saying that he wanted to have nothing to do with corporations anymore.
He went on a.
Podcast and he said, I can say anti Semitic things and Adidas can't drop me. I think he thought he was like so valuable that that company was forever stuck with him, and that co parenting thing that he thought of where he would just do his own thing and the company would sell his stuff and he would still make money off of it. Perhaps that was the arrangement that he wanted long term.
I should say that business. We tried to contact ye for comment, but he couldn't be reached. What are they going to do with the shoes?
Kim?
For the last several months over at Adida's headquarters in Germany, executives have been trying to figure out what to do with this one point three billion worth of shoes, right so they've considered all sorts of things. They thought about removing the Yeasy logo from the shoes and then selling them that way, or they could have donated them to victims of you know, disaster struck countries and things like that.
Burning them came up.
As well, incinerating all these shoes, as some luxury companies have done in the past with excess merchandise, so that they don't end up out in the world, and like dilute the brand. They thought about chopping them into bits and then turning them into soccer fields, like the turf on a field needs plastic and all this other stuff.
But Adidas has decided to sell their remaining easy inventory, and they say they will donate a portion of the proceeds to charities, including the Anti Defamation League.
Are people gonna want to buy them?
Yeah, that's a big question, right. We don't know if they're going to be put on sale for cheaper. We don't know, you know, in what order all this stuff will be sold. And it's also unclear how long this is going to take them to clear all this inventory, because we're unsure what the demand is.
Right.
Are we going to be sitting here in twenty twenty six still talking about Adidas with its remaining pile of yeasies that it can't get rid of.
I don't know, but we had to Wayne and see.
So Tim At the beginning of this year, Adidas got a new CEO and what's his plan to take the company forward? Post yeasy.
In January, Adidas broad in Bjorn Gulden, a Norwegian veteran of the industry, to be the new CEO.
And he didn't have to come from far.
Bjorn had spent the last nine years as CEO of Puma, which is located about one mile south of Adidas, also in hertzogn Aurach, and Bjorn is also has Adidas in his blood. He spent the first decade of his career at Adidas in the nineties. People say he knows basically everything about the industry. He's been so immersed in it. So whereas Casper Wrestaid was an outsider who came in, Bjorn like it's flowing through his blood. He immediately appointed himself as the head of global brands.
He thinks the company needs to.
Be a lot faster, a lot better at managing its product cycle. He's going to have to cook up some new collaborations. So he hasn't put out a new strategy for DTIs. He claims he'll probably do so later this year early next year. But if you had to guess what it is, I would say it's the following a much bigger long term.
Focus on results.
He's not as obsessed with the quarterly results as his predecessor.
He has a much longer term vision.
He has gone out of his way to set expectations very low from investors. This constant just like punch punch punch of bad news that Adidas investors have endured in the.
Last few years.
Bjorn basically came in in February and he said, guys, this is a dire picture.
That we have.
Bear with me, Batten down the hatches. We're gonna fix this. Just give me some time. It's going to take a few years, but we're gonna get there. So some people sold at that point. Those who stayed are Bjorn believers. They've seen his touch at Puma, where he tripled sales in nine years. He is a guy who is obsessed with sports. He wants Adidas to not be so focused on a small number of sports, but he wants to
see it in every event at the Olympics. He doesn't care so much if Adidas is making wrestling shoes or ski boots. They may not be the most lucrative of sports. But he thinks that as a company that's obsessed with sports, as a company that was founded and spent decades as the world's biggest sports company, that's the DNA of Adidas. And the final thing I would say is he recognizes and articulates the difference between Adidas and Nike. People have
always wondered, why can't it just catch Nike. Bjorn says, we shouldn't try, We should just be Adidas. Nike is based in the US. Nike look at Air Jordan. Nike has the advantage of it can just basically create street culture in the US and then export it to around the world. Everyone wants to buy the US streetwear. Well, Germany doesn't have its own street culture that countries want to copy, so Adidas has to do it differently.
Tim, Tim, thanks so much for coming on the show.
You bet of course, thanks for having us.
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