By Craig Margolius
It’s not often a giant, global story offers a prime example of what can go wrong when a company lacks full control of its intangible assets. But the public outbursts from music artist Ye do exactly that.
On Tuesday, apparel brand Adidas ended its contract with the American rapper to sell his “Yeezy” line of footwear. The brand’s reason for dropping Ye (previously known as Kanye West) was a series of publicity stunts by the artist that offended multiple groups of people.
Adidas joined a growing list of companies that have stepped back from associating with Ye.
High-end fashion house Balenciaga, talent scouts Creative Artists Agency and investment bank JPMorganChase also cut ties with Ye earlier this month. Film and television production company MRC also said it will not be airing a documentary on the rapper and Facebook owner Meta restricted Ye’s Instagram account.
The partnership was highly profitable for both parties.
In 2020, the “Yeezy” deal generated nearly €1.7 billion in revenue for the Germany-based Adidas, according to Bloomberg, and was due to expire in 2026.
In a press release, Adidas expected to see a “short-term” impact of €250 million ($US250 million) in revenue over the remainder of the 2022 calendar year. Shares in Adidas fell as much as 8% after the announcement but have since pared those losses.
The revenue dip will be a blow to Adidas, which earlier this year warned its profit margins and sales were suffering as stock accumulated in warehouses due to slowing consumer demand.
The financial hit has also hurt the rapper. According to Forbes magazine’s list of billionaires, Ye’s net worth has dropped from $US1.5b to $US400m after the Adidas announcement.
No back-up plan
This story is packed with lessons about the value of intangible assets. But more importantly, it is a great example of the risks of not managing those assets correctly.
Ye was the full package for Adidas. He had star power, a history of success and incredible charisma. Adidas and Ye made a lot of money selling millions of shoes and other clothing.
While it is unfair to blame Adidas for failing to predict the future (no company has that kind of insight), there is always a risk of uncertainty when dealing with humans. As the old adage goes, past performance does not indicate future returns. Ye’s outlook on life might have been one way when Adidas signed the Yeezy brand, but his worldview has clearly changed since.
While we don’t know the details of the confidential agreement between the two parties set up in 2013, it likely did not include a clause covering what would happen if the intangible asset of Ye’s brand lost value.
That’s the first lesson for companies observing this saga: if the relationship with a brand ambassador falls apart, does your company have a backup plan to ensure business continuity?
No matter how good the deal looks, or how much revenue it may have generated, human uncertainty can never be fully discounted. The last thing a company wants is to send out a conciliatory press release to a hungry media.
Overreliance on “influencers”
But Adidas was always going to suffer immensely from the Ye saga because the apparel brand had backed itself into a corner.
Market analysts Morningstar estimated that Yeezy sneakers (which retail for between $US200 and $US700 each) brought in $US2b annually for Adidas, making up 9% of the company’s revenue.
No matter which way these figures are sliced, that kind of exposure to a brand that turned out to be heavily reliant on the public image of its founder was a terrible marketing strategy. No company should ever find itself in such a compromised position.
Indeed, what happened between Ye and Adidas this week must be making the boards of many companies profoundly nervous.
Since reaching maturity in the past ten years, social media technology has allowed for networks of millions of people to follow high-profile people or celebrities, creating the so-called “influencer” phenomenon.
This dynamic has been a treasure trove for many companies. By deploying a simple marketing strategy, companies asked celebrities to use or wear their products as they go about their day, taking selfies and attending parties.
Companies couldn’t believe how easy – and cheap – it was to generate high returns on investment with such a light marketing touch.
Check your intangible assets
However, the strategy of celebrity endorsement has always run the risk of creating a business bottleneck.
The problem with the “influencer” strategy is that without the nod of approval from a high-profile person, there is often nothing inherently great about a product or service to differentiate it from competitors.
So, should an “influencer” relationship disintegrate for whatever reason, the average consumer now has no compelling reason to keep buying the company’s product since it looks identical to other options on the shelf.
Ultimately, while the Yeezy brand was fantastically lucrative for Adidas, the company learned too late that it never truly controlled one of its most valuable intangible assets.
Public blow-ups like this will certainly speed up the recalibration (and some might say decline) of the age of the “influencer” as a default marketing strategy.
Yet it should also act as a red flag – or at least an orange flag – for every company to look through their own basket of intangible assets to check if they have full control over factors like brand, relationships, design and the network effect.
As originally published in The Business Times