In today’s Finshots, we dive into the rumours of what might turn out to be quite an odd collaboration between Adidas and Bata India.

The Story

Adidas’s brand collaborations are iconic.

And we’re not just talking about the typical sneaker deals with athletes such as James Harden. That’s a given for a sports brand. We’re talking about its out-of-the-box partnerships.

Such as with the luxury brand Gucci. Adidas went straight after the uber-rich crowd who wanted luxury embossed on their sporty sneakers.

It has product partnerships. With Xbox. Yup, with a gaming console. Adidas realized that tapping into a product’s loyal fan base can be quite lucrative too.

And it has even worked with rival shoemaker Allbirds in the US. You don’t often see rivals collaborate. It’s like McDonald’s launching a special burger with Burger King. But here, the motive was actually quite clear. Allbirds had made a name for itself by making plant-based, low-carbon sneakers. And with people turning more environmentally conscious, Adidas figured a great way to launch its own low-carbon running shoe was to collaborate with someone who already had part of the expertise.

But Bata???

Bata isn’t premium. Bata isn’t luxury. Bata isn’t a product that evokes loyalty (or maybe it does depending on who you ask). Instead, its claim to fame in India is the humble school shoe! So what’s the unique selling proposition here? And you can’t imagine that you’ll see a sneaker stamped with an “Adidas x Bata” logo, right? It simply seems too farfetched.

So, what’s really in it for Adidas?

Well, there might just be a couple of things.

For starters, there’s no one who can really compete with Bata’s reach in India. It has over 2,100 stores peppered across 700+ towns and cities in the country. It’s quite incredible. So imagine that dedicated section for Adidas or pop-ups feature in these stores now. It gives the German sportswear brand an unmatched advantage over its rivals. It’s definitely something it needs to build out a proper India presence. Especially since it signed the jersey sponsorship deal with the Indian cricket team. It needs to steal back the market from Puma which has raced to the top thanks to its collaboration with Virat Kohli.

Then you also have to remember that Adidas doesn’t rely on importing all its shoes. It manufactures many of its sneakers in India too. Not on its own but with the help of third parties like Apache Footwear and Mochiko Shoes. But with the deal, maybe they’ll get access to Bata’s manufacturing facilities in Kolkata and a couple of other spots too. And maybe Adidas will be able to leverage these factories and bring its own costs down even further. It could help the company earn better margins.

Maybe.

But what about Bata? What’s in it for them? Because investors certainly seem excited. The stock immediately jumped by 5% on the rumour.

Well, to understand this, we have to turn to its rival Metro Brands.

Now Metro sells slightly more premium formal shoes than Bata. And as per brokerage reports, its stores are more concentrated in areas where the per capita income is higher too. So there is that bit of a difference. But at the core — both of them are known for shoes you’d wear to work.

Metro has been working quite hard to change that though.

See, in 2015, it first struck a deal with Crocs. You know, the company that became really famous for making those really ugly (or cool, depending on your taste) looking plastic-looking slip-ons with holes punched into them. It wasn’t an exclusive deal, but it basically gave Metro the first right to distribute Crocs throughout India — through its existing stores and by setting up flagship stores as well.

And guess what?

Crocs became a real money spinner for Metro. Apparently, Crocs made up 17% of Metro’s revenue in FY21. And this was two times higher than its contribution in FY18. A part of it could also be explained by the fact that the Average Selling Price (ASP) for Crocs is around ₹2,000 and higher than a Metro shoe brand’s ASP of ~₹1,400.

If you break down Metro’s revenue today, you’ll see that 30% of its revenue comes from third-party brands such as Crocs and Skechers. Oh yeah, it distributes Skechers, the popular running shoe brand as well. And this could probably inch slightly higher because it now has the rights to distribute the sports brand Fila in the country too.

So yeah, Metro is playing smart. Rather than trying to create its own products in these niches, it’s simply teaming up with big brands that already own the space. The payoff is probably bigger this way. And as per ICICI Securities, the benefits of this approach have been quite significant — it has improved customer footfalls, the gross margins are higher, and the fact that international brands are reposing faith in Metro kind of opens up new avenues of growth too.

You can see why that’s a playbook that Bata would want to replicate too.

Because the thing is that Bata India has kind of been in a rut of late. The revenues are just a tad bit above the pre-pandemic levels.

Analysts think there might be two reasons for that.

Firstly, a significant portion of Bata’s stock-keeping units (SKUs) falls into the sub ₹1,000 price range. Call it the mass affordable selection if you wish. And this segment has been feeling the heat quite a bit thanks to inflationary pressures and economic uncertainty. In fact, earlier this year, Metro actually said that it plans to exit this category because there was too much pricing pressure in the segment after GST was hiked. So that would’ve hampered Bata’s growth too.

And secondly, there seems to be a trend of ‘sneakerization’ or athleisure. People want stuff that’s more comfortable. And when you think sneakers, you’re not going to think Bata, right? It really hasn’t made too much of a mark here.

The end result of all this is that Bata has been losing out. HDFC Securities crunched the numbers and says that Bata’s market share based on EBITDA (earnings before interest, taxes, depreciation, and amortization) dropped from 21% to 16% in the past 4 years.

It definitely needs a revival. A bit of a fresh spark to turn its fortunes around.

And teaming up with Adidas might do just that. It kills two birds with one stone. It’ll give Bata a premium offering that can drive up the Average Selling Price. And it feeds into the sneakerization wave without Bata trying to do something it might not be too good at.

Now there’s only one thing left to do. We have to wait and see if the rumours are true.

Until then…

Don't forget to share this article on WhatsApp, LinkedIn, and Twitter.

We are hiring!!!

Our team at Ditto (by Finshots) is looking to recruit 'Insurance Advisors'. If you crave an exhilarating journey that challenges you, rewards your drive, and gives you the platform to build exciting initiatives, this is the perfect opportunity for you. Apply now.