Adidas expects a big jump in the cost of sourcing products over the next five years due to rising labor and material costs, but should be able to compensate by lifting prices, cutting its range, and shifting production from China.
The German sportswear maker said higher input costs and currency effects would push down its gross margin by 50-100 basis points in 2016, although it reiterated that its operating margin should stay stable as it cuts operating expenses as a percentage of sales.
John McNamara, head of global sourcing, told an investor workshop that he expected labor costs to keep rising by 11-15% a year, while the price of materials like cotton and nylon could go up 1-4% a year.
McNamara said that Adidas would cut the amount of clothes and shoes it sources from China, while increasing orders to Indonesia, Vietnam, Cambodia, and Myanmar, with the latter accounting for 4% of Adidas shoe production by 2020.
“We see Myanmar as one of the last great sourcing markets for our type of product,” he said.
Adidas is also setting up a German factory operated largely by robots that will make its first 500 pairs of running shoes early next year to support the bid to cut labor costs and speed up delivery to fashion-conscious consumers.
Adidas relies on more than 1 million workers in contract factories, particularly in countries like China and Vietnam, to make the roughly 600 million pairs of shoes and items of clothing and accessories it sells a year.
Adidas has been trying to compensate for the rising cost of labor and materials by improving the efficiency of supplier factories as well as by cutting about a quarter of its ranges.
As most contracts with Asian suppliers are denominated in U.S. dollars, Adidas has been trying to hedge against the stronger greenback, but cannot completely offset the impact on the gross margin in 2016.
To help compensate, it plans “significant” price rises in several regions, but will not rein in marketing spending, which it has hiked to 13-14% of sales as it tries to reverse a loss of market share to bigger rival Nike (NKE).
