The Complete Reebok Fiasco – A Study

 “Reebok International Limited is a British producer of athletic footwear, apparel, and accessories and is currently a subsidiary of Adidas. The name comes from Afrikaans spelling of reebok, a type of African antelope or gazelle. The company, founded in 1895, was originally called Mercury Sports but was renamed Reebok in 1960. The company’s founders, Joe and Jeff Foster, found the name in a dictionary won in a race by Joe Foster as a boy; the dictionary was a South African edition, hence the spelling.”

To understand the Reebok mess, one must first turn to how Adidas and Reebok were run in India, Adidas bought Reebok for $3.8 billion in August 2005, and the two businesses in India operated as separate entities. The process of melding the two Indian entities began only in May 2011 when Subhinder Singh Prem was made the head of the combined entity.

Adidas and Reebok had very different operating styles and management. Reebok culture was more aggressive, and bordering on brash. Adidas, on the other hand, operated in a more disciplined manner. Its employees went about scouting the market more methodically.

Adidas started using the minimum guarantee approach, its teams were forbidden from deviating from certain minimum parameters while negotiating these deals. Everything had to be approved by its headquarters in Gurgaon. However this was not the case in Reebok, no minimum parameters were set, and franchisees were lured with minimum guarantee model where reebok India would pay a fixed amount – a minimum guarantee – to a franchise to make up for losses or a deficit in turnover. Even the leftover stock is returned to a company. The Minimum Guarantee model insisted that the turnover from a store must be at least three times the money paid and the loss-making stores are to be shutdown. However, In Reebok’s case, none of these checks was followed because Prem’s intent was to show the “big numbers”.

Prem launched a massive expansion in India. As a result of this, in no time the number of Reebok stores shot up to more than 800, Reebok had only around 100 in 2003. This was done at the cost of profitability and margins of the company. Prem next turned his attention to volumes. Franchises were billed goods beyond their selling capacity and were assured that the company would manage leftover stocks. Geller and his team raised red flags, the increasing number of complaints from partners and the disputes regarding redeeming stocks were pointed out to headquarters but the headquarter looked the other way in the belief that the allegations were an upshot of a corporate contest between Prem and Andreas Geller, who was the managing director of Adidas India. This clearly depicts how internal politics and lack of care by the original company and the greed for more money can play a damaging role to the reputation of a company.

The game plan to expand backfired.

Franchisees stopped payments, demanding that their leftover stocks be addressed first. Disputes with distributors and franchisees became rampant; it was unable to pay its vendors. Receivables, money to be recovered from partners, were accumulating as were inventories. The crisis had precipitated. Reebok India now had the full attention of the Adidas headquarters. As first step towards fact-finding, they named Shahin Padath as CFO of the combined entity. Padath is an Adidas veteran, but more importantly he was an outsider to the Reebok India system, someone Prem had no control over. His mandate was clear: investigate the true state of affairs at Reebok India.

Reebok India’s sacked managing director Subhinder Singh Prem on March 25, 2012. Director Shubinder Singh Prem and COO Vishnu Bhagat of Reebok India were booked for commercial irregularities on May 21, 2012 after internal investigations by Company’s finance director Shahin Padath. In an FIR filed, the German sports goods maker, which owns Adidas and Reebok brands, alleged that former Reebok India MD Subhinder Singh Prem and former COO Vishnu Bhagat were involved in a series of frauds that may have cost the parent company Rs  870 crore. The company accused the two former executives of misappropriation of funds, fictitious inflation of sales revenue, stealing and diverting products and keeping them in four secret warehouses, despite Adidas having around nine warehouses.

(However these observations are based on media reports, as Adidas has not clarified on what it exactly meant by “commercial irregularities” nor has it made public the copy of its criminal case filed against Prem.)

Meanwhile, other agencies too have started probe into Reebok India. The corporate affairs ministry has ordered a scrutiny of the books of Reebok’s Indian arm. The Registrar of Companies (ROC) will submit an initial report under Section 234 of the Companies Act. A detailed investigation will follow if ROC finds anything amiss. The income-tax department, which conducted a survey at the Gurgaon office of the sportswear manufacturer, has launched a probe into its finances and has begun to issue notices to its executives. The Serious Fraud Investigation Office (SFIO), probing the alleged irregularities at Reebok India, is likely to submit its report by November as the sportswear maker is still finalizing its accounts. SFIO, under the Corporate Affairs Ministry, is looking at the alleged Rs 870-crore financial scam at the company over a period of time. Institute of Chartered Accountants of India (ICAI), the body that regulates auditors and accountants in the country, said it will independently probe whether there were instances of professional negligence by chartered accountants. Audit firm N Narasimhan & Co is the auditor of Reebok India.

Ernst & Young in the forensic analysis report on the company’s accounts stated that Reebok India’s sacked managing director Subhinder Singh Prem and former COO Vishnu Bhagat had indulged in fudging of accounts books, double discounting and preparing fake invoices. E&Y has already submitted the report to the Gurgaon Police. Although the exact facts will emerge only as the case progresses in the courts, it’s not hard to predict that the allegation are of inflating the revenues on one hand, and the colluding with franchisees at the expense of the company on the other.

Adidas recently announced top-level management changes with Claus Heckerott replacing Subhinder Singh Prem as managing director and Frederic Serrant taking over as sales director. Adidas have started to shut stores, develop new ones, settle disputes, and address receivables and inventories. Adidas has announced its plan to shut down one-third of its 900 Reebok stores in India as a part of its restructuring strategy. With Reebok it is as good as starting from scratch. The consolation is that Adidas is on a comfortable perch. It may be time to put on those running shoes in India.