Adidas, Reebok franchisees on collision course over new business terms

Trouble is brewing among franchisees of Adidas and Reebok over new terms and conditions for operating stores. The German sports-goods maker, which is the second-largest in the world after Nike, has given an ultimatum to some 70 franchisees in the Delhi-National Capital Region (NCR) region, asking them to accept the new terms or shut shop by August 31.

Among them, these franchisees operate 125 Reebok stores in the Delhi-NCR region.

The new terms proposed by Adidas seek to do away with the minimum guarantee (MG) model that the franchisees were operating on so far. Under the MG model, franchisees were assured a minimum amount from the company irrespective of sales. It was because of this model that Reebok was able to set up some 900 stores in 325 towns and cities becoming the largest sports-wear brand in India.

What Adidas, which acquired Reebok globally in 2005 and merged operations in India in 2011, is pressing for now is offering stock to franchisees at a reasonable discount. But franchisees, which have formed a consortium called Delhi Reebok Franchisee Association, allege this is simply not viable because of the investments made by them so far. “Most of us have taken big loans and have invested with Reebok. Our livelihood is at stake along with thousands of employees working at our stores,” a statement from the consortium said.

The consortium also says the notices issued by Adidas to its members to either accept the new terms and conditions or shut shop has come as a big surprise. “We were given assurances in the last three to four months by Frederic (Serrant), sales director and Claus (Heckerott), managing director, Adidas, that nothing would go wrong. But all of a sudden, the franchisees have received notices from the Adidas Group on August 13 to accept the new terms or close down our stores by August 31. We do not accept the new terms giving us just over 15 days notice.”

A meeting held today at the Adidas office in Gurgaon, near Delhi, between the franchisees and the company management to discuss the matter proved to be inconclusive, persons in the know say.

“We’ve had repeated rounds of discussions with them asking them to make the business model viable or pay our dues in the event we do not want to shift to the new business model. But they refuse to do anything,” says a franchisee, who declined to be identified because of the sensitivity of the matter.

“It is clearly mentioned in our agreements that all our investments will be returned to us and our stocks will be taken back at purchase price. But since the time of the FIR lodged by the new management against the old management, they have been busy in investigations. Our sales at stores have almost reduced to half due to the mess,” the franchisee said.

An Adidas spokesperson, when contacted, said he had no details to share on the issue.

The company, however, had recently said it was restructuring operations in India including the possible closure of nearly a third of its 900 Reebok stores, a voluntary retirement scheme (VRS) for its 200-odd Reebok employees and an integration of Adidas and Reebok brand suppliers.

Speaking for the first time since Adidas had taken a Rs 870-crore hit due to commercial irregularities at Reebok, Heckerott had said: “We are changing our model from a minimum guarantee scheme (rent plus model) offered to franchisees, which is not sustainable for a cash-and-carry model. One-third of the franchisees are ready to go with this model. The others are not sure or will not go. However, we’ll be happy with 300 outlets, provided they are profitable. We had begun slowing down the opening of new stores from 2010.”

Franchisees allege that they’ve not received any new Reebok stock from the company for the last few months, which has only compounded matters for them. For the April-June quarter, Adidas reported a 26 per cent decline in sales of Reebok-branded products despite group revenues growing seven per cent. Adidas had attributed the fall in Reebok sales to the negative impact of the commercial irregularities in India.