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Adidas stock slides as it drops Kanye: What’s the real cost to ADS?

By Jenal Mehta

12:40, 26 October 2022

fresh yeezys in a box made by adidas
Adidas drop deal with Kanye West, Yeezy products will no longer be produced - Photo: Shutter Stock

Adidas (ADSGN) has condemned multiple anti-Semitic remarks made by Kanye “Ye” West in the past week, and has dropped their multimillion partnership with the rapper.

In their statement the German clothing band said that “Adidas does not tolerate antisemitism and any other sort of hate speech.”

They plan to immediately cease production of Yeezy products. However, whether these products will be pulled from the shelves completely has not been confirmed yet. Adidas share price plunged almost 15%.

This deal has brought in more than $250 million (£216m) a year for Adidas, a significant amount of money for a firm which has been struggling in other lines of business. This might be the reason perhaps why Ye had the confidence of saying in a recent podcast interview that “I can say anti-Semitic things and Adidas can’t drop me”

Adidas (ADSGN) Price Chart

This situation comes amid a tough year for clothing brands who face immense rise in production costs and a similarly severe decline in demand. Adidas warned about profit squeeze earlier this year as it saw stock piles build up.

Adidas (ADSGN) share price has been lowering even before the Kanye West situation, trading at 45% lower than it did just 6 months ago. Nike (NKE), Skechers (SKX), and Lulu Lemon (LULU) have also seen a significant decline at the same time.

Now more than ever, celebrity brand endorsements have become important for firms in this sector in order to sustain demand.

 

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The importance of celebrity endorsements 

Deals such as this are not uncommon in the world of clothing and sportswear brands, and this is for good reason.

Neil Shah, Executive Director of Content & Strategy at Edison Group tells capital.com “Sports brands do not rely on celebrity endorsements per se, but they are a very important part of the marketing mix. They are more efficient than most other marketing techniques and complimentary to other brand spend”

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He says this is the reason why in the past decade, the influence of mass market celebrities and other influences has magnified in the clothing industry. “They can, in fact, make or break a brand.”

The right kind of endorsement can elevate the brand to new heights and allow them to tap into a loyal consumer base.

He adds that there can be risks as “recent episodes have also shown how misalignment can also damage a company's reputation."

Nike (NKE) Price Chart

Adidas fundamentals in danger?

The financial impact for Adidas from cutting ties with Kanye West is likely to be significant.

As per Shah: “The costs for Adidas from breaking ties with Kanye are two-fold. First, although the initial losses are estimated at $250 million a year, this figure could increase significantly if Adidas decides to pull Yeezy products from shelves in brick-and-mortar stores and online, causing the company to lose revenue from any potential sales. Secondly, the company will also have to absorb losses coming from arrangements already established with manufacturers."

However he adds that the company is strong enough to survive this. And that in fact the reputational cost of continuing the deal was likely to be higher in the long run

“It is clear that this loss will not severely impact Adidas's fundamentals. Additionally, by distancing themselves from Ye following his antisemitic remarks, Adidas (ADSGN) is preventing any long-term damage to its reputation that could potentially lead to customers distancing themselves from the company's brand.”

 

Markets in this article

ADSGN
Adidas
207.05 USD
2.05 +1.000%
LULU
Lululemon Athletica
392.98 USD
3.27 +0.840%
NKE
Nike Inc (Extended Hours)
93.73 USD
-0.39 -0.410%
SKX
Skechers
61.12 USD
0.2 +0.330%

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