In May 2012, German sports and footwear company Adidas said it had uncovered an accounting fraud at the India operations of its Reebok business, which it had globally acquired in 2005. The fraud, to the tune of Rs 870 crore, was allegedly perpetrated by Reebok’s former employees and their associates, and became a serious setback to the company’s operations and financials in India (Reebok is still in losses in India, though Adidas is profitable).
The alleged wrongdoing is still being probed. But the Adidas Group, the country’s largest sportswear manufacturer by sales value, has course-corrected since then and says the ghosts of the scandal are behind it. The intervening years have been spent strengthening the checks and balances to avoid a repeat of what happened in the past and putting in place strategies for future growth.
In FY2015, Adidas India Marketing Pvt Ltd reported a turnover of Rs 805.13 crore, up 9.1 percent over the previous fiscal, and its profitability rose to Rs 56.04 crore, up 49 percent year-on-year. In the same period, Reebok India reported Rs 333 crore in revenues, up 2.6 percent year-on-year, and a loss of Rs 57.78 crore versus a profit of Rs 14.59 crore in 2013-14.
Leading Adidas Group India is Dave Thomas, 44, who has been with the company for 17 years; he was previously vice president and brand director for Adidas’s Emerging Markets business based in Dubai. He took over in India from Erick Haskell in October 2014.
Thomas tells Forbes India that he has spent the first ten months of his Indian stint consolidating the sports brands’ store network and sorting out issues related to inventory management. Going forward, the focus will be on increasing the proportion of premium products sold in India. He also intends to expand the store network into new cities and formats. In fact, Adidas’s new omni-channel retail strategy will be key to its future success in India, says Thomas. Excerpts from an interview:
Q. How has the Adidas Group dealt with the financial irregularities that surfaced at Reebok and what is the lesson learnt?
Fortunately that episode is behind us. We have increased control on the measures that we have put in place as an organisation. We had an internal audit conducted by our headquarters and our Dubai office. We did a risk assessment and we are working with the findings of these studies to make things even tighter. From a brand and business point of view, we are ensuring that Reebok clearly articulates its brand message by working with the right partners, getting our stock levels right and increasing customer interaction.
The lesson we learnt is that we need to have checks and balances in place and the right kind of people running operations. Without these, you open yourself up to huge risk. What we saw was that a few people can tilt the apple cart and the actions of a few can reflect badly on the entire organisation. When we speak of Adidas’s brand values, authenticity, passion and honesty are key. We need to be true to those values.
Q. What is the Adidas Group’s future strategy for growth in India?
We have 760 stores across India, across three brands Adidas, Adidas Originals (that falls under the fashion and lifestyle category) and Reebok. We want to take it up to 1,000 stores by 2020. We have been historically strong in cities like Delhi, Chennai, Kolkata and others in the east and northeast. But we are not as strong in markets like Mumbai and Bengaluru and we will attack these markets heavily in different ways.
We are also going to increase our omni-channel retail approach. We have equipped around 80 stores, mostly in and around Delhi, with tablets that can be used to buy our products online, which are then delivered to the customers’ homes or can be picked up from our stores. The initial response has been encouraging. In the early days, when we had tablets in only ten of our stores, we sold 86 pairs of shoes through our online channel. That shows us the tremendous opportunity that omni-channel retailing holds for us. We will increase the number of stores covered under omni-channel retailing to 200 by the end of the year and to 400 by April next year.
Q. What percentage of your total sales comes from omni-channel retailing at present?
It is very small but more than what we had expected. In some of our bigger stores, around 5 to 11 percent of sales comes from the omni-channel approach. Our initial aim was to drive 1 to 2 percent of sales through this model, but now the target is near the 5 percent mark.
Q. You have sought the government’s approval to open your own branded stores that will be wholly owned by you. Why do you need to open your own stores when you have multiple franchisees in the country?
It gives us a lot more flexibility to bring in different concepts and larger stores, and that may not be possible with franchise partners. We are very keen on expanding the franchise with better partners who can help us offer premium experience to consumers. We have some great partners, but if we want to open 5,000-6,000 sq ft-stores with our latest products, which are expensive, all our partners may not be keen. The approach is to have a few big stores that will showcase the brand. We may build 20 such outlets in the next three-four years.
We have concept stores in the US, UK and the Middle East but you won’t find our newest concepts in Indian stores. These are our HomeCourt stores (styled like sports arenas) with trial rooms in the form of locker rooms and interactive virtual walls. We want to bring these stores to India.
Q. How do you see your market share in India increasing in the future?
Taking into account both brands, Adidas (of which Adidas Originals is a part, and Reebok) has a strong market share of around 45 percent. While it will grow in the future, it may not be hugely different. The focus going forward is on how this growth comes. So we are focusing a lot more on the premium sections of the market. With Adidas Originals, we are moving into the fashion and lifestyle domain. In certain categories of sports footwear, we are seeing how to sell more shoes that cost Rs 16,000 a pair rather than those that cost Rs 3,000 a pair. Earlier, a pair of shoes that cost Rs 10,000 was considered aspirational, but it is not so aspirational any longer. From nothing, the percentage of premium products we sell as a part of our overall portfolio has gone up to double digits.
Q. A lot of brick-and-mortar stores such as the ones run by your franchise partners have suffered loss of business due to the onslaught of ecommerce players. How have you dealt with their concerns?
The growth of ecommerce caught everyone off-guard in India. No one was prepared for it. For us, it is about striking a balance between the two modes of retail and working with the best partners—be it online or offline. The online retailers are the first ones to admit that the level of discounts that we have seen thus far will not sustain in the future. Ecommerce companies are a lot more conscious about profitability now. They also want to work with premium brands and are aware that it cannot happen if they keep offering deep discounts. We have tried to ensure that we give different products to different retailers; that our new season stock is not sold at a lower price. We don’t want a customer to come into a store and then find that product cheaper somewhere else. Of late, we are also seeing that a lot of our customers are doing their research online and then coming into the stores to touch and feel the products, get their queries answered and then buying them. We also try and ensure that when the end-of-season sale period kicks in, there is consistency in the pricing of our products online and offline.
Ecommerce is important for us as around 18 percent of our sales comes from it. It has also helped us correct a lot of the inventory concerns (excess inventory) that we had with our partners. We are in a good position now with our partners telling us that they need fresh stock for October. When I had joined in October 2014, they were telling us that they didn’t need stock even for the month of November (2014). We have cleaned up our inventory and created more desire for our brands.