<p>When he went to Phoenix, Arizona, at the end of March to attend Adidas’s annual business plan meeting, Subhinder Singh Prem had no inkling of what was in store for him. The German company’s India MD was armed with a plan to combat the slowdown in business. On the evening of March 25, Prem, who is 44, was summoned by his boss, Adidas Chief Sales Officer (multi-channel markets) Roland Auschel. The no-nonsense executive, who had played a key role in the integration of Reebok with Adidas after its acquisition in 2005, told Prem plainly that things were not working out and he should call it quits.
Prem might have been stunned at the suddenness of the decision, but his friends say it did not take him completely by surprise. Differences between the Adidas brass in Germany and Prem had, after all, been festering for some time. So, Prem had been thinking of branching out on his own with a startup venture in the retail sector — familiar territory for the veteran salesman. Three days later, Prem put in his papers.
It was the end of a 17-year association. A graduate of IMT Ghaziabad, Prem, slightly built but cocky and an avid runner, had risen through the ranks at Reebok to head its Indian operations in October 2003. Under Prem, Reebok had become the country’s top sports footwear brand, far ahead of Adidas, Nike and Puma. Its share of the Rs 3,500-crore market was as much as 50 per cent. India was the only country where Reebok was the market leader; everywhere else it stood fourth. A year ago, once Reebok was integrated into Adidas, Prem was made the head of Adidas Group India, a clear show of confidence in him. His abrupt departure was bound to set tongues wagging.
But the script was set to turn messy. The day after he resigned, Prem received a short email from Adidas headquarters that his services were being terminated with immediate effect for a “cause”, according to legal documents reviewed by Business Standard. In his place, Adidas nominated Claus Dieter Heckerott. This meant that Prem would not get contractual payments, including his severance package. It was followed by a formal letter. Shocked and shaken, Prem shot off two emails to Adidas asking why he was being removed. He got no answer.
That was the lull before the real storm.
A month later, on April 30, Prem received an email from Christina Lee, the Asia-Pacific general counsel of Adidas, saying that the key reason for his termination was evidence that company financials had been manipulated, according to the legal documents. The same day, Adidas advanced its earnings call by a few days, and announced that there were “commercial irregularities” at the Indian unit of Reebok, headed by Prem. It said the situation could result in a pre-tax impact of up to €125 million (Rs 871 crore) and further restructuring could cost up to €70 million (Rs 488 crore) in 2012.
Prem sent two legal notices through his lawyers, Luthra & Luthra — one a Rs 15 crore defamation notice for tarnishing his image and the second to claim Rs 12.70 crore in dues including the severance package. The notices, of course, challenged his removal and called the appointment of his successor, Heckerott, illegal. In the notices, Prem said that he was not given a chance to explain his position, which is his right under the Companies Act. The correct course would have been to give him the opportunity to present his case before a decision was taken, he argued. Prem, who has always eschewed corporate suits and prefers T-shirt, jeans and the latest Reebok sneakers, says: “I was left with no choice as they pushed me into a corner. I have to fight back to get my reputation back.” Prem has since moved the Delhi High Court on the matter.
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This public spat has opened several debates. Many see it as the fight of a swadeshi achiever against a foreign power. After all, it has happened before. Darius Ardeshir abruptly quit Nestlé India in 1998 after differences erupted between him and the Swiss parent over management style and strategic direction. In 2009, Asif Adil resigned as the managing director of Diageo in India following “a breach in the internal code of conduct”.
Some see it as the classic clash of egos when a bigger brand is acquired by a smaller brand (Reebok was bigger than Adidas in India). They point to the reduced fortunes of homegrown brands like Uncle Chipps and Maltova & Viva after they were acquired by multinational corporations PepsiCo and GlaxoSmithKline, respectively.
Still others call it an integration problem, which afflicts most high-profile takeovers. Says KPMG Advisory’s Associate Director Anand Ramanathan: “It is a case of post-merger issues when two similar brands or businesses come together. As a consequence, team members of the acquired entity begin to feel alienated as is the case here.” Meanwhile, the income tax department has swung into action; it went to the Adidas office in Gurgaon and asked it to share the accounts of Reebok India.
So what factors were at play? Adidas has not spoken out after its announcement of financial irregularities on April 30, and says that, given the sensitivity of the ongoing investigation, it cannot comment further. This was in response to a detailed questionnaire from Business Standard. Prem also says he would not like to comment. Insiders say that the cleanup is being led by Heckerott, a finance man. “Generally, you would get a chief executive with a background in sales or marketing. But to bring in a finance man is a clear indication of the German company’s intention,” says a source close to Adidas.
Prem, of course, denies any commercial irregularity. He has, in the legal notices, said that the company was not run by one man and that all accounts were kept by the finance head (who was from Adidas), cleared by the statutory auditors, and taken on record by the board; so why blame him? The process-driven German company insisted on monthly reports which were sent to headquarters, he says.
Informed sources say the first signs of friction between the two began to emerge when Adidas placed expatriates and old Adidas hands in key positions in India. The trigger seems to be the losses made by Reebok in 2010-11 after several years of profit. The Reebok team had prided itself on its achievements — their brand was the undisputed market leader and some of them, like Muktesh Pant and Siddharth Verma, had been chosen for prestigious overseas assignments. Prem, in particular, objected to the appointment of Frederick Serrant as sales director, because he thought that an Indian was better suited for the job. But the Adidas management overruled him. The losses may have weakened Prem’s case.
Under Prem, Reebok set up over 1,000 stores across 325 towns and cities, more than double the number for Adidas (450-500 stores) and more than thrice that of rival Nike (300 stores). The rapid expansion rode on the “minimum guarantee” model, according to which the retailer would be compensated by Reebok if his profits after three years fell short of an agreed amount. In return, Reebok would offer these retailers lower profit margins. This covered all risks for the retailer, and gave Reebok a handle to grow its footprint wide and fast. Reaching markets ahead of rivals, it thought, would give its retailers high volumes and reduce payouts under the minimum guarantee model. A lower margin for retailers also meant more profits for the company.
About half of Reebok’s retailers opted for the minimum guarantee. Others chose to do without, and to keep the higher margins. Industry watchers say that so long as the market was booming, nobody complained. But in the last three years, the sportswear marker stagnated and lease rentals spiralled, which together squeezed retailer profits. Under the minimum guarantee programme, these losses and shortfalls in profits had to be made good by Reebok, and its new owner Adidas. The payouts must have been substantial, though sources close to Prem say they were not that substantial and were accounted for.
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Did Prem and his team misread the market? Many say that Prem’s aggression was no longer paying off, as he did not create a distinctive brand position for Reebok. Says Ramesh Jude Thomas, president and chief knowledge officer of Equitor Management Consulting: “While Nike conjures images of a strong, youthful brand for athletes, and Adidas of German precision, I do not know what Reebok stands for. That is why there was more dependence on distribution and pricing. As a result, the brand was stretched, with too many stores. Obviously a strategy like this is fraught with risks." But Prem’s friends say that retailers have to take these risks when confronted with a slowdown. The minimum guarantee scheme, they add, is not new and is used by other large retailers including Adidas, Nike and Levi’s.
Prem, it seems, was aware of the risks involved with the minimum guarantee model and was taking corrective steps. After expanding at breakneck speed between 2005 and 2009, he closed more than 100 stores in 2010-2011, and convinced another 100 retailers to give up the minimum guarantee model. Obviously, this wasn’t good enough to placate his bosses. Marketers say that it isn’t easy to get retailers out of the minimum guarantee programme. “Retailers get very comfortable with such a system. But it was under Prem that we started making the change. Adidas is merely following the same path,” says a senior Reebok executive who quit along with Prem.
Prem’s friends say Reebok got stepmotherly treatment from its new owner. Adidas, in its vision statement for 2015, wants the focus on its core brand of Adidas, not on Reebok, they say. At the moment, 60 per cent of Adidas’s turnover in India comes from Reebok and the rest from Adidas (its third brand, Taylormade, turns in very small volumes). The new management, however, is keen on Adidas achieving more than 50 per cent sales, thereby taking lead position among its brands in India, say persons in the know. It also, allege Prem’s friends, wants the number of employees working on the Reebok brand to be downsized, a point to which Prem has referred in his legal notice.
Prem objected to this plan saying that it should be up to the consumers to decide which brand they want. He was not in favour of reducing financial support for Reebok. Adidas says it has no intention of killing the Reebok brand. An Adidas spokesperson says: “The Adidas group has a clear multi-brand strategy. While the Adidas brand is the multi-sport specialist, Reebok focuses on fitness and training. Our intention is clear and that is to grow the business of both the brands, as part of our Route 2015 strategic business plan.”
Prem has said in the legal notice that his team once came across “scavenger deals” on Adidas footwear, where new stock was being sold at deep discounts to bulk buyers, and wanted to raise the issue with the auditors. But the global management was not willing to listen, say Prem’s friends.
It’s a slugfest — over to the courts.