Adidas Stuck With $1.3 Billion in Yeezy Shoes After Kanye West Blows Up Licensing Agreement
All over the world, boxes of Yeezy shoes are stacked in warehouses and the back rooms of retail outlets, all of them costing Adidas a literal fortune.
According to the German footwear giant, Adidas is saddled with an astounding $1.3 billion worth of the once-popular shoes, which it now cannot sell due to its fractious breakup with the controversial rapper. As well, Adidas is also being hit by a corresponding loss in sales revenue. In its Q1 earnings report, Adidas says the termination of its licensing deal with West, also known as Ye, cost the company $441 million in lost sales in Q1 alone.
That one factor has erased almost all of Adidas’ profits for the period. Operating profit, which excludes some items like taxes, was down to $66 million from $481 million year over year, the result of sales growth shrinking to just 1%, with the company saying sales were expected to grow by 9% had the licensing agreement not been terminated.
The debacle is a case study in what can go wrong when influencer deals go badly, badly wrong.
While taking a billion dollar hit is obviously incredibly painful, Adidas was left with little choice after West issues a series of jaw dropping statements, including openly anti-semitic remarks, posting a swastika on Twitter, wearing a “White Lives Matter” shirt to his Yeezy fashion show in Paris, calling slavery “a choice”, praising Hitler on the Alex Jones podcast, and saying he was going to go “DeathCon 3” on Jewish people.
Adidas responded by reviewing the agreement and then cutting ties with the controversial rapper. “Adidas does not tolerate antisemitism and any other sort of hate speech,” the company said in a statement last October. “Ye’s recent comments and actions have been unacceptable, hateful and dangerous, and they violate the company’s values of diversity and inclusion, mutual respect and fairness.”
Adidas also said it was worth paying the price in order to end its ties to someone who had made several racist statements, and openly supported fascism, but now the company is literally counting its losses, and must decide what to do with all those shoes. Adidas is “getting closer and closer to making a decision” on what to do with the sneakers,” new CEO Bjorn Gulden said, adding, “the options are narrowing.”
There’s also the question of waste. Throwing out $1.3 billion worth of shoes would be an environmental nightmare, and Gulden has also said the company is “trying to avoid that.” However, Adidas is faced with nothing but bad options. For example, selling the sneakers would mean paying royalties to West, and would ignite a furious backlash against the company. Removing the brand would almost certainly violate Adidas contract, and giving them away could end up with the shoes being resold due to their high market value.
The bottom line for the Kanye West catastrophe is that Adidas could post an operating loss of $771 million this year, most of it due to the $550 million hit it will take by not selling the existing inventory of Yeezy shoes.
Adidas Ends Partnership With Kanye West Over Antisemitic Posts
Gulden admits the breakdown of the Kanye West partnership is going to hurt Adidas, but insisted 2023 will be a transition year, with a good 2024 and a better 2025 to follow.
But many analysts are not so sure, pointing to other problems the company is grappling with in China.
That country represents the second largest market for sportswear, and Adidas has previously been very successful there.
However, over the past fiscal year, Adidas saw its sales in China drop by 36%.
The analyst David Swartz from Morningstar says that issue is actually more serious than the large but short-term hit Adidas is suffering due to the Yeezy situation.
“Their numbers there have been just abysmal,” said Swartz. “They’ve clearly lost market share, and that has a bigger impact in the long term than even Yeezy does.”
In its recent earnings report, Adidas said Q1 sales in China fell by 9.4%, and its market share in the country has declined from 19% in 2019 to 11% today.
In many ways, Adidas is a prime example of the issues facing Western brands in China, which has retaliated against companies critical of its policies and human rights records. Adidas is among the many companies that were critical of China’s treatment of the Uigher people in the textile producing province of Xinjiang, and its brand has suffered a backlash due to its moral stand on the issue. As well, China’s recent crackdown on celebrity social media influencers hurt Adidas’ marketing efforts, as the company had been enjoying very positive results from its influencer relationships.
“That means that the demand in the market is now higher than it was last year in Q1,” he said. “For the first time … (in) the last two and a half years, we are actually optimistic that the numbers will turn from red to green.”
Adidas has also appointed a new head of the Chinese market, Adrian Siu, and the company is making more clothing and footwear specifically for the Chinese market. Currently, about 10% of the Adidas products sold in China are designed locally, and Gulden says that will soon increase to 50%.
Update: Trademark Filings Reveal Kanye West’s Licensing Strategy