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Adidas admits to India irregularities

Global sportswear major Adidas on Monday admitted to "commercial irregularities" at the Indian unit of Reebok, its most popular and the leading sportswear brand in the country.

The admission came a month after managing director Subhinder Singh Prem and chief operating officer (COO) Vishnu Bhagat stepped down after long stints.

Adidas said on Monday the situation in India could result in a pre-tax impact of up to euro 125 million (Rs 871 crore), while further restructuring could cost up to euro 70 million (Rs 488 crore) in 2012.

"The situation in India, although unfortunate, will allow us to now accelerate plans to improve a specific underperforming part of our business," Chief Executive Herbert Hainer said in a statement.

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Adidas admits to India irregularities

Adidas had replaced Prem with Claus Heckerott. The COO's position was abolished; Frederic Serrant was appointed as sales director, instead.

"Under the new leadership team, management is undertaking an accelerated restructuring of its business activities, including significant changes to its commercial business practice, as part of the course of action to protect the group's interests in India. Adidas Group is firmly committed to India and is well positioned to build on its leadership position in the coming years," a statement from the group said.

Prem, when contacted on the issue, declined to comment, saying he had already left the company.

However, sources close to the previous management say that last July as well in December, the German sports footwear company decided to shift in India and in many parts of the world from a minimum guarantee system of payment to its franchisees to a wholesale model entailing a one-time upfront cost.

"It is difficult to understand the large restructuring cost being shown, as the company's turnover is around euro 100 million (or Rs 696.6 crore). Also, the old management was not blamed for the new strategy. It is difficult to understand what was the commercial irregularity they are talking about, as they have not been asked to explain," said a person part of the old management.

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Adidas admits to India irregularities

Adidas has three brands in India, including the flagship brand that shares the same name as that of the group, Reebok and TaylorMade.

The latter targets the golfwear market, while Reebok and Adidas are known for sportswear products.

Prem, who was earlier the Reebok India MD and took over as the Adidas India MD last year, has been credited with turning around Reebok's fortunes in the country.

Globally, Reebok comes fourth after Adidas, Nike and Puma. However, in India, the pecking order is led by Reebok. It leads with a share of 53 per cent in a market estimated to be Rs 3,500 crore (Rs 35 billion) in size.

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Adidas admits to India irregularities

Before the global takeover of Reebok by Adidas in 2005, the company had mostly Indians as the top bosses in India, which included Muktesh Pant and Siddharth Verma.

Many of them took key postings abroad after their India stints. Prem, however, repeatedly refused foreign postings and preferred to expand the Indian operations.

With over 1,000 stores in over 325 towns and cities, Prem had expanded operations aggressively in the country, with both affordable and premium-priced products.

However, Reebok is not the first multinational in the country to see a major change at the top following differences between the local management and the parent.

In 2009, for instance, Asif Adil, managing director of Diageo India, quit suddenly following "a breach in the internal code of conduct".

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Adidas admits to India irregularities

Both Adil and Diageo at that time had declined to comment on the issue, citing a non-disparagement clause in their agreement.

But the exit of Daraius Adeshir, managing director of Nestle India, in 1998 was not as low-key, with the former tendering his resignation abruptly after differences between him and the Swiss parent over the management style and strategic direction.

The parting was so bitter that Nestle India had to explain to the Bombay Stock Exchange why it had not informed it about Adeshir's resignation.