How the shoe bites for Adidas

The Reebok issue in India has given footwear major Adidas a bruising kick out of the blue.

While India isn't one of Adidas' top three markets, it was one of the growth markets it identified for its Route 2015 plan, and analysts had a sense even in the past few months that India was a “stable and profitable” business.

There were a few teething problems when Adidas first took over Reebok for €3.1 billion in 2005, say analysts, over the inventory in channels, for example. Integration was slow but steady.

Such instances/allegations of irregularities haven't been very common in the sector, though one analyst who spoke on condition of anonymity pointed to one instance in 2010, where PPR-owned Puma had issues with its joint venture in Greece.

In October 2010, Puma said it had discovered “irregularities” committed by its Greek joint venture Puma Hellas, and had initiated a comprehensive audit, but suspected that “the Greek joint venture partner along with members of the Greek local management, had committed a series of criminal acts”.

The “irregularities” happened prior to 2010 – and Puma was making provisions for a write-off of up to €115 million pre-tax, and €15 million for restructuring the business.

Quick resolution

Adidas is also known for tackling any controversies that come up swiftly: so, for example, when Reebok International, its US-based sports division, was accused of making deceptive claims about the ability of its EasyTone and RunTone shoe divisions to strengthen muscles by the US Federal Trade Commission, it settled very quickly last September, agreeing to pay $25 million towards refunds for customers. (Refunds didn't apply in the India business, it should be noted.)

Adidas is very tight-lipped about what “commercial irregularities” involved, though during an analyst conference call during the announcement of its quarterly results on May 3, the Adidas CEO, Mr Herbert Hainer, clarified that it was not “compliance issues” but “commercial irregularities”.

The trouble is also limited to Reebok India and has nothing to do with the Adidas brand in the Indian market, he stressed repeatedly.

The restructuring will be aggressive, and will include “significant changes to our commercial business practices”.

He hopes to have the India issue resolved quickly. “Rest assured, our goal is to begin 2013 with a clean sheet in this market,” he said on the call.

The reason for the rejig of the Indian business, including cutting around a third of the retail stores, is because Adidas wants “a sustainable healthy profitable business for both our retail partners and ourselves”, he says.

The company says the earliest update on what happened in India is likely to be given during its next quarterly results presentation in August.

The company doesn't seem perturbed by the former Adidas India Managing Director's threat of litigation over the damage to his reputation. While giving no direct response to his specific charge, the company sticks to the steps that it has taken.

“We will do everything to protect our interests in India, and have made changes pending an investigation,” a Frankfurt-based spokesperson.

The analyst community is pretty concerned about the latest India developments.

“Adidas has a clean reputation and is not known for any such instances in the past. The fact that the €125-million in charges that they are calculating, tells me this is not a small problem, given the size of its Indian business.

“It's a big charge in terms of revenue from that business,” says Frankfurt-based Metzler Equities analyst Mr Sebastian Frericks.

“At the same time, by taking a €70-million restructuring charge they seem to be aggressively addressing the issue.” (Adidas doesn't break sales down by country, and won't confirm any figures, though during the conference call one analyst said they expected sales in India were “significantly less than $300 million” and wasn't contradicted.)

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