Adidas 2002 Annual Report Download - page 89

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87
MARKETING COSTS /// Strengthening and expanding a strong
brand identity requires considerable expenditure in terms of
marketing and other forms of communication. Because the
impact of marketing campaigns cannot be fully predicted in
advance, product launches are subject to considerable finan-
cial risk. Working with top-tier marketing and advertising
agencies to create messages and thoroughly evaluating major
campaigns allows us to minimize the risk of disappointing
results.
PRODUCTION AND SUPPLY /// The vast majority of adidas-
Salomon products are produced by independent factories in
accordance with our technical and design specifications.
Inferior quality and/or delivery delays can impact Group
revenue and reputation. To mitigate this risk, adidas-Salomon
employs more than 100 quality control officers who monitor
factory performance. Detailed product cost analyses are
performed both before purchase and over time to ensure
competitive pricing and identify opportunities for further
margin improvements. Regular benchmarking of all
suppliers identifies optimal product allocation, cost, quality
and delivery performance. To avoid over-dependence on
individual suppliers, we maintain relationships with
numerous and geographically diverse manufacturers, all
of whom adhere to our best practice standards.
CURRENCY /// adidas-Salomon largely outsources production
to the Far East (Southeast Asia and China) where sales are
transacted in US dollars. As a result, 70 to 80% of the sourc-
ing volume over the last three years was incurred in US
dollars. The percentage of sales revenues in US dollars and
other non-euro currencies is significantly lower, with about
half of the Group’s sales denominated in European curren-
cies. Changes in exchange rates, especially the relation
between the US dollar and the euro, therefore have the
potential to markedly affect revenues. To reduce exposure in
these areas, natural hedges are applied wherever possible.
The transactional currency risk is concentrated at our
sourcing entities, which invoice Group companies primarily
in their local currencies. As protection, the Group hedges
currency risk for a period up to a maximum of three selling
seasons, using a combination of forward contracts and
options. Until early 2002, we concentrated our hedging on
forward contracts, with a smaller share of options-based
hedges. At a very early stage in the decline of the US dollar,
we shifted our concentration to options-based hedging
instruments, which provide downside protection while, at the
same time, leaving enough room for participation in further
favorable exchange rate developments.