Is Sponsoring Manchester United a Smart Move by Adidas?

A much-rumored deal has finally turned into reality with the German sporting goods retailer Adidas AG (ADDYY) announcing a 10-year sponsorship deal with Manchester United plc MANU. Adidas landed the agreement after the world's leading sporting goods company Nike Inc. NKE announced the end of its 13-year relationship with the English football club. (Read: Nike Bids Adieu to Manchester United Sponsorship)

As per the deal, Adidas will pay a sum of up to £750 million (nearly $ 1.3 billion) over 10 years or £75 million (nearly $130 million) per season starting from 2015-16, leaving behind the record breaking deal between Puma and Arsenal, which starts next season.

We believe that the recent agreement with Manchester United is a prudent move taken by Adidas toward marketing its products, as the company has been lagging behind of late with its arch rival Nike adopting aggressive promotional strategies.

Although, in the recently concluded 2014 FIFA World Cup both finalists, Germany and Argentina, were sponsored by Adidas, the company loses ground to Nike on basis of the number of teams sponsored and boots used by the players.

This was the first time in the mega soccer event's history when a company has sponsored more teams than Adidas. In the soccer World Cup 2014, Nike sponsored 10 out of 32 teams while Adidas and Puma sponsored 9 and 8 teams, respectively.

Moreover, during the FIFA World Cup, Nike made a smart advertising tactic by signing contracts with most of the World Cup playing nations to endorse its brands by displaying its “Swoosh” logo on the jerseys and making 53% of the players wear its boots. Nike believes that its marketing strategy will boost the sales of its soccer products in fiscal 2015.

Nike has now become world's leading sporting goods company after it first entered the 1982 World Cup sponsorship race. Since then Nike has been gradually eating Adidas' market share and now retains a global market share of 17%, leaving Adidas way behind with a 12% market share.

As 2014 FIFA World Cup ended last Sunday, companies are now looking for other opportunities to push their brands. Therefore, we realize why Adidas entered this sponsorship deal with the 20-time English Premier League EPL champion at such a hefty price.

The company has also been aggressively focusing on marketing strategies. In the World Cup alone, the company launched various new ads featuring Lionel Messi of Argentina, Bastian Schweinsteiger of Germany, Luis Suarez of Uruguay and Dani Alves of Brazil. These marketing strategies have boosted Adidas' sales during the soccer mega event and are expect to be beneficial throughout the year.

Adidas targets revenue of about 2 billion Euros ($2.7 billion) from its soccer division in 2014. This is ahead of Nike's revenue of over $2 billion from soccer sales in 2013. Nike also projects that it will register a double-digit sales growth in the ongoing fiscal.

Based on its revenue size, Nike is the largest sports gear company across the world with about $25.3 billion revenue for 2013 while Adidas ranks only second with $16.3 billion annual revenue.

Despite all these factors, the question remains that whether these marketing efforts will help fetch expanded sales for Adidas?

Well, commenting precisely on this is difficult. However, we see these marketing tactics and money spent for the sponsorship as a long term investment for the brand. Even if it does not pay off with an immediate rise in sales, results will start to show in the long term as the brand continue to grow in popularity among the masses.

Meanwhile, the battle between sporting retailers over soccer has benefited Manchester United in getting such a huge sponsorship amount.  The share price of this English club gained approximately 4.8% during yesterday's trading session.

Other Stocks to Consider

Currently, Adidas and Nike both carry a Zacks Rank #3 (Hold). A better-ranked stock in the shoe/apparel retail industry is Brown Shoe Co. Inc. BWS which holds a Zacks Rank #2 (Buy).