Adidas gets nod for own stores, franchise format to co-exist

So far, single brand retail policy did not permit a combination of business, and international chains were told to pick either of the two formats

German apparel major Adidas has been allowed to operate fully-owned stores in the first major approval by the National Democratic Alliance government for 100 per cent foreign direct investment single-brand retailing in India.

Adidas, in the news earlier for alleged fraud at Reebok, a brand it owns, made its application to the department of industrial policy and promotion in July.

The seller of sports shoes, clothing and accessories present in the country through franchises for two decades can now operate both fully-owned stores as well as franchise outlets in the country. So far, the single-brand retail policy did not permit a combination of business, and international chains were told to choose between fully-owned and franchise stores.

Nike was earlier turned down by the government, and it subsequently re-applied.

The first fully-owned Adidas store was likely to be launched in the second half of 2016, said Dave Thomas, managing director of Adidas’ Indian operations. “Own retail will take our market leadership position even higher. It will allow us the flexibility to bring in global concepts in larger stores,” he added.

Adidas, like any other single-brand retailer with over 51 per cent FDI, must comply with mandatory 30 per cent local sourcing within five years of incorporation. The FDI amount involved is not known, but the approval to Adidas is expected to generate interest because a prominent chain is receiving government nod after a long gap. The NDA government is opposed to FDI in multi-brand retail, blocking Walmart, Carrefour and Tesco from setting up supermarket chains in India.

The minimum investment a company should make under the single-brand route is $100 million (Rs 650 crore). Sweden’s furniture chain Ikea has made the biggest investment proposal at Rs 10,500 crore in single-brand retail. Other big names are fashion brands H&M and GAP. Marks & Spencer and Zara operate through joint ventures with Indian groups.

The Adidas application was only for Adidas stores, and not Reebok outlets. The group runs 760 stores as franchises for Adidas, Adidas Originals and Reebok. This number is expected to go up to 1,000 by 2020. The chain also plans to continue its focus on omni-channel initiatives. For the financial year ended March 2015, Adidas India reported sales of Rs 805 crore and profit before exceptional items and tax of Rs 56 crore. Reebok recorded revenues of around Rs 330 crore with losses of Rs 57 crore for the year ended March 2015.

“Our emphasis in India is to grow profitably and consolidate our leadership with an increased focus on the premium segment of the market,” Thomas said.

Reebok India had filed a report with the Gurgaon police in May 2012 alleging key employees, including former managing director Subhinder Singh Prem and the then chief operating officer, Vishnu Bhagat, committed fraud to the tune of Rs 870 crore. Subsequently, in its annual report for 2012, the German group said its balance sheet for 2011 had taken a hit of an estimated Rs 1,477 crore due to the fraud in India.

Following an investigation by the Serious Fraud Investigation Office, a complaint filed in a Gurgaon court and with the corporate affairs ministry indicted the parent company, the Adidas Group, for lapses in corporate governance practices and internal controls at its Indian subsidiary. It, however, provided a clean chit to the then Adidas India managing director, Claus Heckerott, and Shahin Padath, the then director of finance, in the list of the accused, on the ground of being whistleblowers in the fraud case. Legal experts do not expect any fallout of the financial fraud on Adidas' current proposal.

Following the alleged financial fraud, Adidas India had gone through an organisational restructuring - putting in place controls, along with checks and balances - with more involvement of the parent group in the day-to-day operations. It moved from a minimum guarantee-driven model to a cash-&-carry model for its franchise operations. Over the past year, it has repositioned its stores as 'fit hub'. As part of its omni-channel strategy, customers can now order a particular footwear model not available in the store through in-store tab and get delivery at their home.