Potholes where Adidas tumbled

Allegations and counter-allegations mark the Adidas scam. While most preferred to remain tightlipped about the incident, the blunders were unearthed with the ongoing probe. The question that arises now is if the competitiveness and profitability blurring the difference between ethics and non-ethics.

 

Adidas, the second-largest sportswear brand in the world, only after Nike, is now caught in a dicey situation in India. It has to rectify the expansion procedure in the country, has to nurse the damage for the loss of € 125 million (about  `870 crore) incurred by Reebok and has to uphold its image before the world that as a parent company it is equally concerned of a sickened brand, Reebok, as it is for Adidas. The allegation of fraud was labelled against Subhinder Singh Prem, the MD of Adidas India along with Vishnu Bhagat, the COO. Fictitious sales, ghost warehouses, false showing of increased profit margins for the customers, stealing of  `114 crore from the business investors in the name of launching franchised stores and other means were utilised to create false accounts. With the FIR issued against Prem and his accomplices, the Corporate Affairs Minister, Veerappa Moily, announced that this fraudulent case is now under the purview of SFIO (Serious Fraud Investigation Office).

 

The announcement by the global CEO of Adidas, Herbert Hainer, about the commercial irregularities in India and imminent changes in business operations on May 3, followed by hasty appointment of Claus Dieter Heckerott brought under public view the abrupt end of Subhinder Singh Prem’s 17 year stint with the group.

 

WHY DID ADIDAS WAKE UP SO LATE?

Although Adidas acquired US-based Reebok in 2005, the integration of the two companies only happened recently in mid 2011. And then on the next year what we see a state of chaos and over-active management rigorously rectifying its faulty system in India. The recent allegation by Adidas’s global management of money laundering  raises questions since all the accounts are checked by Adidas head quarter - how come Adidas couldn’t smell the whiff of irregularities and Prem still managed to grab the coveted position of Managing Director of Adidas India, replacing Andreas Gellner ? Was that Adidas had no choice, but to acknowledge the frontrunner who had designed such mammoth growth plan for Reebok? Although at that time his disregards for professional ethics was camouflaged under die-hard ambition to rule the market.

 

If we take closer look during this period between 2005 and 2011, it will be clear that Reebok was single-mindedly focusing on the expansion, taking it from around 300 outlets to 1000 plus. “Top 100 Retail Brands” coverage in Retailer 2010 shows Adidas had more than 600 stores spread around 170 cities, and Reebok had 920 stores.  Though ahead by footprints, another source reveals that PAT (Profit After Tax) of Reebok was Rs -40.1 crore in March 2010, which gave rise to the dissatisfaction amongst the vendors, suppliers and above all the franchisees.  Adidas on the other hand beat the market slowdown to register PAT of  `9 crore in March 2010. 

 

MINIMUM GUARANTEE, MAXIMUM FAULT

The business strategy of Reebok was built on myopic plan that missed out the pitfalls of the distant failures. The idea was somehow to open a store, without taking care of the credentials of the franchisees, alluring them with a dream of a global brand association and high returns. The faulty model of minimum guarantee was continued too long, draining out the financial resources of the company. Explains Ankur Shiv Bhandari, Managing Director- Indian Sub Continent, Kantar Retail, “If the franchisor is not able to convey clear guidelines, control in place to convey the brand message, ethos, commercial stewardship, value and prevent grey market (applies to certain categories only), as it was originally intended, then there is a big risk of brand image distortion, irregularities and complexities in the supply chain. If strong controls are not in place, minimum guarantee could potentially stifle motivation and not help the original brand owners get the desired result."  The same happened with Reebok that lost its brand identity amidst other global sportswear brands like Puma, Adidas and Nike. The risk associated with minimum guarantee is further elaborated by Devangshu Dutta, Chief Executive, Third Eyesight: “In India a large proportion of franchises are signed up by investors with property who are not involved with the operation of the store itself. In this investor mindset, if there is a minimum guarantee in place and offers are decent return, how the store performs is really of no consequence." Reebok is the victim of such mindset and over ambition that skidded for loosely arranged business plan. 

 

TARNISHED IMAGE OF INDIA: SENDING THE WRONG MESSAGE 

History repeats itself.  Two other such allegations of financial irregularities can be recalled in the context of Subhinder Singh’s case. In March 2004, the then Managing Director of Adidas India, Tarun Kunzru, Chief Operating Officer (COO) Harish Doraiswamy and Chief Financial Officer (CFO) Shriram Ranganathan were asked to quit following the financial irregularities discovered by Adidas Asia Pacific team. In January 2007, Yum! Restaurant’s MD, Sandep Kohli, resigned along with Ajay Bansal, Director -Operations and the CFO, Anupam Bhattacharya.  This was followed by Enforcement Directorate (ED)'s allegation of financial irregularities. 

 

Despite political furore, from all business quarters voices are raised for the foreign investment needed for development and growth.  But the incidents like these will definitely dent the confidence of the foreign investors on the accountability and credibility of the Indian professionals whom they generally rely on heavily, considering the intricacies of the unknown market where a local business associate paves the right path of business growth.  A partnership has to be built on trust where an iota of suspicion can spoil the venture. Besides red-tapism and inconstant government policies, the question raised on professional ethics of the Indian business drivers is the last blow on the nail. This may lead to lose the business interests of the global corporates.  

 

Views are there that Indian professionals are sometimes the victim of western snobbishness. For them this is an example of expatriates overruling the contribution of an Indian professional. Such conflict is enough to stir the news mongers. Does this theory hold enough truth?  Not sure about since the cases are pending and none of the accused is convicted. There’s no rationality if we term the case as face-off between the brand acquirer and brand acquired. There are examples like Limca and Thums Up, two home grown brands, which are still leading brands in the Coca-Cola franchise or brands like Vicks, Gillette and Duracell acquired by Procter & Gamble (P&G), which till date play a leading role in P&G’s profit.

 

COMMUNICATIONS FAILED?  

The Adidas-Reebok fiasco makes an obvious point of failures in HR practices. These global sportswear brands in the rat race of business expansion has fumbled with some basic fundamentals, failing to create ethical ecosystem, relying too much on one man leadership. Considering the scale of scam, it’s natural for anyone to doubt about the communications between Adidas’s India office and headquarters. 

 

Harkirat Singh, MD of Woodland, comments, “Involvement through a two-way communication is critical leading to establishing a strong bond with the owner and other work-colleagues. At Woodland, we work as an open organisation. It’s the mutual trust between me and my team that everyone is empowered enough to support individual as well as organisation’s growth path."

 

AUTHORITY MISUSED

A professional at the top is entitled with high authority and independence, but the brand owner has to rein in that authority when it shows even a faint sign of malpractice. Insiders in Adidas knew about violence of ethical practices, franchisees did complain about their unsold inventory but Prem had the liberty to direct the situation in his favour for quite a long time. Vikram Bakshi of McDonald’s agrees that the empowerment is the key for the success of a professional. “I feel there should be a clear understanding on the goals and expectations in between the brand owner and business head. This helps in building the long term success of the brand, and is crucial for sustaining the trust at the top. Moreover, at McDonald’s, we have systems in place that ensure that empowerment does not turn into a malpractice," he says. Gautam Gupta, President, Guardian Lifecare further elaborates, “Owners should typically have a strong sense of what’s going around in the company – this will ensure that professionals at top positions are moving in the right direction. Review mechanisms and strong processes ensure that right practices are being adopted to take the business forward."  Singh stresses on reference check. To prevent malpractices he suggests, “Don’t underestimate the recommendations given by references and be sure to actually check references."

 

REGULAR AUDITING: HAS IT BEEN DONE?

Most of the corporate fraudulence involves mismanagement of vendor/supply operations, and such allegations are labelled against Prem and his accomplices. The stirring question here arises is how come a corporate house like Adidas can be blindfolded in order to disrupt the SOPs (Standard Operating Procedures).  How fineries are implemented to cheat on the organisation!  Why didn’t Adidas conduct regular audit to monitor the adherence to SOPs? Gupta of Guardian Lifecare tells that frequency of the audit depends on the activity being audited. It can range from being a monthly exercise to a yearly one. Singh reveals that audit is an ongoing process at Woodland and like his teammates the suppliers to the organisation have ensured right fit for the brand at all times.  He informs, “As a professional system, it’s the synchronised effort of my purchase department and audit team that has relevant check-point to avoid any miss."

 

IMAGE ONCE LOST HARD TO GAIN BACK

Building of trust is an indispensable component for enhancing brand value. One common example is how internal disputes always get reflected in stock prices coming down.  It’s a natural propensity of a consumer to have trust on a brand with clear image. The operational dysfunction at Adidas India has a hard hitting on the brand image.  Subrata Dutta, Managing Director, India & Middle East, Samsonite South Asia Pvt Ltd expatiates over the issue: “If what an organisation promises to the external world is inconsistent with what is happening within, it will directly result in brand erosion. This will have direct negative impact on the professionals working for the brand as well potential joinees and the consumers at large. In today’s competitive scenario retaining a brand’s lost faith is more often than not, impossible."  It’s now in Adidas’s hand to repair the damage suffered by Reebok India at the hands of some scheming officials.