“It came to me as a bolt from the blue,” laments Sudhir Arora (name changed to protect identity), an aggrieved Delhi based Reebok franchisee owner. Sudhir is referring to the letter he received some five months ago (in August 2012) from Reebok, the subsidiary of the German sportswear maker Adidas. The infamous letter explained the new terms of the business agreement with Reebok in what was obviously a desperate attempt to improve margins. The sportswear major proposed to do away with the minimum guarantee (MG) model that the franchisees were operating on so far – wherein franchisees were assured a minimum amount from the company irrespective of sales. The new model was instead based on flat margins of 35% on store sales. Sudhir alleges that the letter was a ploy to get rid of them and that they would incur huge losses if they agreed to the new arrangement. The letter also gave franchisees an exit route. It said that if franchisees did not want to continue, they should liquidate their leftover stock at up to 50% discount in 15 days. At the end of the given deadline, Reebok will repurchase the leftover stock at not more than 10% of the wholesale price. Given that various industry estimates pegged the value of leftover stock at approximately Rs.10 billion, it was obviously a losing battle for franchise owners to sell off all the leftover stock. Sudhir says that the only option before them was to sell back to the company and incur losses. Around 500 franchisees own and operate nearly 900 Reebok stores in India.
Predictably all hell broke loose after the franchise owners received the by-now notorious letter. The Delhi Reebok Franchisee Association held demonstrations against the company in front of its office in the National Capital Region and ran from pillar to post to ensure a fair deal for the beleaguered retailers. The deadline to liquidate stocks at 50 percent discount was later extended till November 30, 2012, but did not bring much succor to the store owners. “As per our agreement with the company, Reebok was supposed to take back any unsold stock at the purchase price of the store owner. We have liquidated whatever stock we could at even an 80 percent discount, but have suffered huge losses in the process,” bemoans Sudhir.
For now, the Reebok Franchise Association is negotiating internally with the company to bring some relief to besieged franchise owners. But the affected parties plan to move court for succor if talks with the management breakdown at any point.
Not that India is the only market suffering under the dithering management of Reebok and Adidas Group globally. Commerzbank’s Christoph Dolleschal has even gone ahead and called Reebok a “never-ending restructuring story”. And rightly so. It started in May 2009 after Adidas Group Chairman and CEO Herbert Hainer announced that the company’s first quarter profits were down by 97% from a year ago. The German firm had bought British rival Reebok in 2006 to help it compete against Nike, but Reebok sales continued to be sluggish. That is when Hainer presented an urgent restructuring plan to bring Reebok back on the growth path. The plan not only included shutting down regional offices in Europe and Asia, but also closing down many retail stores in a bid to cut costs. The project was supposed to bring an annual savings of 100 million Euros, or $133.1 million to the Group starting in 2010. Three years on, that restructuring exercise still continues. Towards the fag end of 2012, Reebok laid off 150 employees and closed its Hong Kong and Amsterdam offices as part its reorganization and implementing a global-direct operating model.
Unfortunately for Reebok, the sportswear brand’s woes in India are even more serious. Apart from the apparent flak they are drawing from troubled franchise owners, the alleged Rs. 8.70 billion fraud perpetuated by former India MD Subhender Singh Prem and COO Vishnu Bhagat has also cast a negative shadow on Reebok in the Indian market. The accused, employees of Reebok and Adidas group for close to 16 years, are presently in jail on charges of operating four secret warehouses in Delhi to keep clandestinely diverted and stolen stocks.
Both the Gurgaon Police and the Serious Fraud Investigation Office (SFIO), an arm of the ministry of corporate affairs, are presently investigating the matter, but the scam’s impact on Adidas Group has been phenomenal. Despite group revenue growing by 7% globally, Adidas reported a 26% decline in sales of Reebok-branded products during the April-June quarter, and attributed it to the negative impact of the commercial irregularities in India. Being a listed entity in Germany, parent company Adidas is surely facing heat from stakeholders and investors in the company on the fraud perpetrated in India. While repeated phone calls to Reebok India office by the 4Ps B&M team yielded no response, people in the know opine that the estimated re-assessment of the previous year’s accounts due to this fraud could cause the Adidas group a loss of as much as Euro 125 million.
Will BRAND REEBOK TAKE A HIT?
The monetary loss for Reebok from the negative fallout expected from this India ‘fraud’ saga is likely to be compounded by the huge erosion in brand equity of the world’s largest sports gear manufacturer Adidas, which registered global sales of Euro 11.5 billion for the first nine months of the year 2012. “Apart from the restatement of the prior year accounts, the incident (fraud in India) can attract huge fine for the parent company from the German regulators. All in all, this is not an incident which will be washed out just by making some financial amendments,” explains Shivam Mishra, Senior Financial Analyst, Shrine Securities and Capital Investment.
Reebok – which merged with Adidas in India some years ago, is the unchallenged market leader of the Rs. 35 billion Indian sportswear market and boasts an almost 46% market share. Interestingly, India is the only country in the world where Reebok is ahead of both Adidas and Nike in terms of brand awareness and sales. While allegations of a fraud at the Indian arm may not really make a dent in Reebok’s popularity among consumers, the shutdown of a large number of stores and agitated franchise owners taking to the streets may not go very well down the brand equity street. Says Shrinivas Ayyar, Brand Strategist, RBC Worldwide: “As a brand, Reebok is still loved by its target audience. Hence, I see nothing wrong on that front. But as their stores down shutters, competitors such as Nike will stand a luscious chance to monetize on the lost ground.”
If the brand’s troubles stretch out indefinitely, Reebok faces a clear and present danger of its pole position in the Indian market being usurped by rivals such as Nike. Competitors are all set to move in for the kill after the vacuum created by the shutdown of Reebok stores. Currently, Nike has about 300-400 exclusive stores in the country as compared to Adidas’ over 650 and Reebok till recently had 900 stores (before the recent restructuring) – which gave it a superior distribution edge. In contrast to Reebok’s surprising pullback from the lucrative Indian market, Nike recently expressed its retail expansion intentions by going in for a multi-channel distribution strategy. With so many Reebok franchisee owners going out of business, this could be a god sent opportunity for Nike to cash in on. Other sportswear brands like Puma, Fila, Lotto, et al, are also likely to join the party.
Irrespective of the benefits that this restructuring exercise is likely to give them, can Reebok afford to lose its edge in the Indian market? Coming at a time when the slowdown in Europe and the US is forcing the Adidas Group to look at Asian and other emerging markets for growth, continued success in the Indian sportswear market is perhaps too valuable for the group as a whole. Growing awareness and health consciousness amidst the Indian middle class is expected to further drive this category by 18-20% CAGR over the next five years according to a PWC report published in February 2012.
A SIMMERING CAULDRON
Incidentally, this is not for the first time that the brand image of Reebok will suffer due to a controversial disclosure. More than three years ago, Reebok launched a big budget, flamboyant advertising campaign claiming that their toning shoes were the “better way to a better butt” and had been “proven” to “tone your butt up to 28% more than regular sneakers.” Reebok’s claims were later found to be totally hogwash and the company was forced to refund $25 million to customers who had bought the so claimed magic toners as per a deal reached with the Federal Trade Commission (FTC) after hectic negotiations. As part of the FTC settlement, Reebok was also banned from “making claims that toning shoes and other toning apparel were effective in strengthening muscles” in their future marketing campaigns. Referring to the controversy, an Advertising Age report states that Reebok invested about $81 million in less than three years in marketing a product which later got banned and brought a bad name to the company.
It will not be as easy for Reebok to navigate this present crisis for its brand in India, where former senior members of the company are languishing in jail, the agitated franchise owners are screaming blue murder and brand visibility is obviously suffering due to the disappearance of a large number of retail touch points overnight.
So, what’s next? “As of now, brand Reebok stands no real chance of comeback. I see it as a very unfortunate incident in which a brand which had a fair perception amongst its buyers is depleting due to issues related to corporate governance. Parent company Adidas has done well to keep its brand away from Reebok,” says an analyst. Rajesh Kejriwal, Director, Saffron Brand Consulting adds that the brand can indeed make a comeback in the country but through a different set of stakeholders. “They need to pull off an out of the box strategy,” he espouses.
Meanwhile, the Adidas Group is still convinced about its “Route 2015” plan under which it is supposed to work in a close association with its key franchisees globally to improve efficiency in store operations. While the logic of cutting out deficiencies and devising ways to improve per square foot sales realization is understandable, how the company hopes to reach out to target customers with a trimmed distribution line-up in India is still an enigma for retail experts tracking the company. The sportswear major also has plans to open some 400 new stores in various emerging markets. If that be the case, the reason for shutting down stores in one of the fastest emerging markets in the world a.k.a India is utterly confounding for market watchers.
Meanwhile, Reebok’s troubles in India are busy taking the shine off Adidas globally. Clearly, its time from a smart move from the sportswear company to stop the wagging tongues.
“Reebok can do a lot”
The brand consultant believes that Reebok still has a good chance to bounce back
How do you see the recent announcement of Adidas to shut down 30% of Reebok stores in the country?
The decision is very surprising and unfortunate. I personally think that before announcing such a decision, they must have internally decided on their re-launch strategy in the country. They may close only those stores which do not comply with the brand idea or where they did not see any synergy between the brand Reebok and the franchisee owners. However, they should give sufficient notice to their franchisees and the decision should have been announced only after taking all their stakeholders in confidence. If this has not happened, then it is completely unfortunate.
Should Reebok be diluting its focus in India at a time when growth in western markets is tapering off?
No, I sincerely believe that as a brand Reebok has potential to do a lot in the country and in fact, it was doing well until this news came off. They came up with some of the most spectacular campaigns and enjoyed a huge brand recall. Reebok has got one of the largest shares in the booming Indian sportswear market and I see every possible reason that it will attempt a strong comeback in the coming years.
Do you think that the financial fraud incident and their partial exit from India will have an impact on their global sales?
Today, we live in a world which is more connected than ever before. Now news does not remain confined to one part of the world. So, in this sense, it will bring some negative publicity for the brand Reebok globally. But since consumer perception about the brand is pretty strong in most emerging markets, I believe that the effect of this news may not be too strong. However, they must make a lesson out o this experience and be careful in future.
What should be the strategy of Reebok in India henceforth?
First of all, they should be very honest about any wrongdoing in the company operations. Once, they come clean, they can plan the road ahead. With the huge customer base in India, it will be just a matter of time when Reebok pulls it off again. They need to work upon their brand side with the help of experts to have a fresh India strategy.
What about the agitated franchisee community?
The franchisees whom they have dropped may not accept them. But India is a land of opportunities I don’t feel that once they have set their mind to getting new franchisees, they will have any problem in doing so. All they need to do is to work out their relationship with the franchisee owners in a more fruitful and mutually beneficial way.
