Adidas Decision To Cut Kanye Is A $10 Billion Decision
Photo Illustration by Matt Roembke.
In the history of sports marketing, companies — when faced with spokespeople who do and say the wrong things — have had a complex history.
The hardest decisions have been made by shoe companies, who have been faced with more of a dilemma because the endorsement is usually more tied to money than the business athletes drive for other companies.
It was an easy decision for Reebok to dump Shawn Kemp after he called the sneakers he wore "throwaways" and said his favorite shoes were made by Reebok's competitor, Nike, partly because the business, in the scheme of things, was negligible.
It was significantly more difficult for Nike to drop Kobe Bryant or Tiger Woods in the same manner because of the size of both businesses. Nike hit pause on the Kobe brand until the criminal case in his rape trial was dropped. The shoe and apparel giant similarly pushed TW branding and marketing to the back burner after Woods' infidelity entered the public light.
Again, the decisions were easy for AT&T, Gatorade and Accenture to cut Woods because, while he was a face on their brand, he wasn't a huge part of their bottom line.
All this serves as context to the decision Adidas made Tuesday morning to discontinue its relationship with Ye, also known as Kanye West, who made a slew of antisemitic comments and then doubled down by saying Adidas wouldn't drop him.
You'll read plenty today about West's disgusting comments and perhaps about Adidas' history as a German company and its connection with the Nazis. (Adidas founder Adi Dassler was a member of the Nazi party, made shoes for Nazi youth and closed down its factory to help Germany during the World Wars.)
Yes, Adidas had no choice but to cut ties, especially after West taunted them. But what makes this even more fascinating is the sheer size of the Yeezy business.
Make no mistake: Adidas cutting West is the biggest termination of a deal in sports marketing history.
The company said the cost of halting the Yeezy brand would result in a loss of $246 million in net income for the fourth quarter.
Sounds low. Until you realize how all this math is done.
A $200 Yeezy is sold to a retailer for roughly $100. Assuming the standard markup, Adidas makes that shoe, with all-in costs, for $50.
Net income takes out all the costs, including labor and materials, to make that shoe. For argument's sake, let's put the net income per pair of Yeezys at $20.
That means that the net income cost to Adidas represents one-tenth of the cost at retail ($20 to make, a $200 cost to consumer), which would put the Yeezy franchise wind down at $2.5 billion. And that's just the loss of sales and the wind down.
That doesn't account for the termination and the rest of the quarters of the business.
(For what it's worth the actual termination won't be costly because West violated even the simplest morals clause with his ugly words).
When all is said and done, this will be close to a $10 billion decision.
To put that in perspective, only one brand in shoes would cost more to stop and shut down: The Jordan Brand.
It's hard to say how badly Adidas was suffering this last week due to holding out. Sure, the stock went down, but the stock has been steadily going down for a year.
And yes, there were petitions and high-end people denouncing his gross words.
What is undeniable is that the heat of the fire certainly got warmer with each day, especially after West was dropped by Balenciaga and CAA.
And that's when, despite the enormous cost, Adidas executives realized that to be on the right side of history was more important than the balance sheet.