Why Adidas is cool again

The story begins like a bar joke. An Indian man walks into an Adidas shop. But this, I’m assured, is a true story. The man asks for the latest model of Yeezy Boost, the much-hyped high-tops designed by rapper Kanye West, but is told the product isn’t available.

What happens next stuns Dave Thomas, managing director of Adidas Group India, who witnesses the scene unfold at Originals, the company’s flagship lifestyle store, in Connaught Place, Delhi. The customer lambasts the store’s limited collection. The most expensive item, an earlier design of West’s Yeezy line, is a cool Rs 22,999 a pair. But the man is far from impressed. He asks why the store doesn’t stock the newest, trendiest, and costliest stuff Adidas has to offer. Bereft of pricier options, he settles for the pair of Yeezys that he had turned up his nose at.

The irony isn’t lost on Thomas who smiles as he narrates the anecdote. Before he came to India, Thomas, who has worked across several geographies in his 18 years at the company, had been fed horror stories about grinding poverty, a culture that neglects fitness, and stingy customers with little regard for the nuances of shoe technology. His early introduction to the Indian shopper would shatter those notions. Thomas, 44, says: “Anyone who has been to India even once from our organisation thinks he is an expert. He feels he has a snapshot of what the country is, but that’s not true. India is a challenging and interesting puzzle.”

Thomas, a thickset, rugby-playing Australian, likes to tackle challenges head on. A formidable presence at over six feet, it is easy to picture him bustling past hapless opponents to score an emphatic try. His experiences in the game have shaped his management style that combines aggression with teamwork. The rugby motif springs up several times over the course of our conversation at his plush corner office on the fourth floor of Unitech Commercial Tower-II, Gurgaon.

The experience in Delhi wasn’t a one-off, Thomas says. A few weeks later, a similarly peeved customer accosts him at another flagship Originals outlet on Linking Road in Mumbai. “I am forced to buy (Adidas products) online from Canada but only after paying huge duties,” the customer complains. “If you bring them to India, I will buy half the stuff.” It begs the question: How important is India to Adidas if customers here can’t buy what they want?

The answer lies somewhere between the size of the local sportswear industry, its immense potential, and the hype around Adidas Originals that has fans across the world queueing up for days to buy shoes designed by a lineup of international artistes including Pharrell Williams, Kendrick Lamar, Rita Ora, and West. Then, there are also the harsh lessons of a corporate fraud at the company’s Reebok unit four years ago.

On the face of it, India is still a small market for Adidas, one of the first foreign consumer labels to enter the country in 1995. To give some context, the entire sportswear market is estimated at Rs 6,000 crore, while Adidas raked in €2.47 billion (Rs 18,627 crore) from China alone in the previous calendar year. Adidas Group reports revenues separately for Asia’s two largest economies, China and Japan, but its annual report clumps the continent’s No. 3 economy together with “Middle East, Africa and other Asian Markets (MEAA)”. Thomas feels the comparison with China is unfair. India is an emerging market for Adidas, whereas China and Japan are classified as developed. Even so, India is far from its largest emerging market by revenue. That spot is occupied by Turkey whose national football team played in the Euro 2016.

But Thomas is gung-ho about the country’s prospects. He plans to nearly double Adidas revenues by 2020 from Rs 805 crore in fiscal 2015. India will overtake Turkey by that time, he declares in his stentorian voice that would be at home rallying players in a rugby scrum. His blueprint involves opening more than 250 Adidas outlets over the next five years, with a target of crossing 1,000 stores by 2020. He also plans to open the first company-owned outlet in the country next year, after Adidas received government approval last November. Currently, franchise partners own and operate all the company’s 850-odd stores, including 100 Reebok outlets.

THE REASON FOR HIS OPTIMISM is fairly straightforward. The local sporting goods industry is booming. Rising incomes, expanding Internet penetration, and changing attitudes towards sports and exercise have fortified demand, says Ankur Bisen, senior vice president of retail consultancy firm Technopak. The times are a-changin’. More and more Indians are playing sports, keeping fit, or leading an active lifestyle. There is growing interest in myriad sports from running to badminton in a country where cricket has dominated for decades. New tournaments, bankrolled by businessmen, film stars and corporates, have sprung up in recent years across kabbadi, tennis, football, and hockey. (Adidas sponsors kabbadi team Maratha Warriors, as well as Indian Super League football team FC Pune City.)

Cricket, however, remains the battle royal in India. Nike sponsors the Indian cricket team, but Adidas signed up the country’s biggest rising star Virat Kohli in 2013. It turned out to be an astute move. Kohli, the natural heir to idols Mahendra Singh Dhoni and Sachin Tendulkar, has since become the face of Indian cricket. Adidas also dominates global football. Sales of its football gear are hitched to Argentine star Lionel Messi, who recently also struck an endorsement deal with Tata Motors. Next year, India will host its first World Cup—the under-17 version of football’s flagship tournament—a testament to its place as a major potential market for the world’s most popular sport.

The numbers are mindboggling: About half the country’s population will be 29 years or younger by 2020. That’s why India, banned in 1950 from playing barefoot in the only football World Cup it has ever reached, is now turning into a significant market for sports footwear and apparel. Bisen pegs local sportswear growth at 18% to 20% annually. The global sporting goods industry, in comparison, is expected to grow at a relatively sluggish compounded rate of 3.4% yearly from 2015 to 2020, according to a report by market research firm Lucintel.

E-commerce, inundated with foreign investment in recent years, is also growing explosively. Adidas is banking on an “omnichannel” strategy that allows online customers to order stuff that may not be available in local stores by sourcing it from a network of nearly 220 outlets. The orders are delivered to the customer’s doorstep in 24 hours in the National Capital Region, the company’s biggest local market, or in 48 hours if the order is from some other state. “E-commerce as a medium allows the company to speak to all consumers at their convenience, time, and place, and gives them personalised content. In that sense, it completes a consumer’s retail experience. He need not go disappointed just because the product is not available in the store,’’ says Abhishek Lal, senior e-commerce director at Adidas group. That said, e-commerce is a long game, as most customers currently prefer to buy their shoes and clothes from traditional brick-and-mortar stores, where they can try out products. Moreover, Adidas only partners with four e-retailers—Flipkart, Myntra, Jabong, and Amazon—to tightly manage supply, and protect its brand image.

If India is a puzzle, then Thomas is in a race to fill in the missing pieces. Larger U.S. rival Nike, Germany’s Puma, and a raft of new entrants are rapidly eating up the metres behind Adidas. Nike, smaller than Adidas in India, is growing at 15%, outpacing Adidas, which clocked 9% higher revenue in 2014-15. Puma, which reports results for the calendar year, recorded sales of Rs 878 crore for the year ended Dec. 31, 2015. The company, established by Rudolf Dassler, the older brother of Adidas founder Adolf, claims it is the largest in the segment, but Adidas, together with its Reebok unit, maintains its lead by revenue. (Most sportswear companies are yet to file results for the previous financial year with regulators.) Newcomers such as U.S. rivals Skechers and Under Armour are also investing heavily to expand their footprint.

Adidas doesn’t have large local franchise partners such as those in China with the appetite and ability to rapidly scale up. Rents are high as space is scarce in India’s crowded urban centres. “Existing retail spaces have a considerably higher rental structure. It puts pressure on business. Considering the potential of India and its population, high-quality malls and premium retail space are not coming up as quickly as we would want it to,” says Thomas.

Moreover, Thomas has to weed out inefficiencies in the supply chain that have long vexed foreign brands. To this end, Adidas hired logistics company DHL Supply Chain in February to manage its distribution, and consolidated nationwide supply to one facility near Delhi, from five centres earlier. “As more and more foreign players enter the country, there will be huge competition at the premium end of the sportswear segment. It is imperative for the foreign players to get their supply chain or logistics right,” says Technopak’s Bisen.

AS COMPETITION HEATS UP, Thomas has to delicately negotiate the legacy of a traumatic fraud at Reebok that shook up the company’s Indian business. In 2012, Adidas sacked managing director Shubhinder Singh Prem and chief operating officer Vishnu Bhagat, after uncovering the Rs 870 crore fraud at its local Reebok unit. Reebok was essentially “inflating sales figures’’ from 2007 onwards, and in turn, overstating profits, showing higher inventory and more warehouses to balance the books. Adidas then filed a criminal complaint in Gurgaon in which Shahin Padath, then Reebok India’s finance director, alleged that Prem and Bhagat had set up secret warehouses, doctored accounts, generated fictitious invoices, and falsified balance sheets. The accused denied any wrongdoing and countersued. (The case against Prem, who was last year hired by Future Group’s label Spunk as a consultant, is still open.)

Just a year before the fraud was exposed, Prem, who had been Reebok India’s chief since 2003, succeeded Andreas Gellner as Adidas Group India’s managing director. The scandal was a hammer blow. Parent Adidas Group was forced to restate 2011 results, slashing profit by €58 million for the year and taking a €153 million hit to shareholders equity on its balance sheet.

It still haunts the group. Reebok, which Adidas acquired in 2005, reported sales of Rs 333 crore in the year ended March 31, 2015, up a mere 3% from a year earlier. The fitness unit continues to bleed money. “While most of the legal and other issues have been resolved, the challenge is not just to make Reebok stores profitable, but cash positive on a sustained basis,’’ says Ranabir Mitra, Adidas group’s finance director. Reebok’s financial statement for fiscal 2015 shows accumulated losses of Rs 2,198 crore owing to the scandal.

Ironically, it was Reebok’s acquisition that expanded the company’s footprint in India. Prior to the scandal, Reebok was the biggest sportswear brand in the country with revenue of over Rs 700 crore and more than 1,500 stores. Prem had aggressively built up the brand’s store network by providing a “minimum guarantee” to franchisees, a concept pioneered by clothing major Benetton. Regardless of a store’s profitability, the franchise partner would be guaranteed some revenue. From the very beginning, Adidas had not approved of the strategy, which led to a standoff with Prem.

Adidas felt the system made franchisees lazy as they had little incentive to improve performance. Furthermore, profitable stores ended up carrying a far larger number of underperforming ones. But Prem refused to ditch a method that had served him well. “The problem with such a model is that the company not only ended up taking on all the risks, but also acted as an insurance company, underwriting the losses of its franchisees. That’s not how a fast-moving consumer durable company ought to work,’’ says Mitra.

The company, severely bloated after years of mismanagement, needed to slim down. Canadian Claus Heckerott replaced Prem to start a bitter restructuring process that involved shutting down a majority of Reebok stores, severing ties with many franchisees, and laying off several employees. “The real issue was that the company tried to do too much, opened too many stores in the wrong places, had too much inventory. We weren’t focussed enough on things that were important to us as a brand,’’ explains Thomas.

After the scandal, the minimum guarantee model was finally done away with. It was a messy affair. Adidas had to settle numerous reimbursement claims of franchise partners. “We had to sort out the claims of nearly 500 franchisees in a scientific manner, which were left unresolved by the earlier management,’’ says Mitra. The company is still reducing its franchise partners as it looks to create larger profitable franchisees. “It will take another year or a year and a half to arrive at the right number. Then these stores will start becoming profitable—a 5% to 10% profit on their turnover,’’ he says.

The focus for Adidas is now more on improving profitability than driving sales, especially at Reebok. In order to do so, the company has reinvented itself. Reebok, which offered steep discounts all around the year, was seen as a “local brand’’. It did not occupy a place of pride in shops. The company had to bridge a divide in culture between its two brands that had been festering for years—they had different managements, boards, employee training programmes, operating styles, and reported separately to headquarters in the U.S. and Germany until 2011. That’s why nearly six years passed before the fraud was even detected, says Thomas.

The group aligned its brands more closely. “A lot of integration happened [following the Reebok fraud] and the whole issue of two people for one job was done away with. Training modules are now the same and standardised very clearly [for both brands] because the product-brand ethos is aligned now,” says Arijit Sengupta, group HR director at Adidas. Today, the distinction between the two brands is clear. Reebok is a fitness brand, while Adidas is a multisports label. Adidas and Reebok are cutting back on discounts to help shore up margins and improve the image of their brands. Full-price selling has jumped to nearly 55% from 30%.

Thomas has displayed his marketing chops in Reebok’s turnaround. He recently hired Silvia Tallon, the first woman in the management team, as senior marketing director at Reebok. She came from Russian lifestyle brand O’Stin, where she was working on brand strategy in Moscow. Reebok has also signed up shapely actors John Abraham, Kangana Ranaut and Nargis Fakhri, replacing cricketer Dhoni who was more a sports icon than a fitness role model.

The group’s makeover began in 2012 when Adidas drafted in Erick Haskell, chief operating officer of the Greater China region for Adidas at the time, as managing director as it looked to move on from the Reebok debacle. By the time Haskell left in 2014 to take over as U.S. rival Under Armour’s managing director in Greater China, both Adidas and Reebok had returned to growth. The recovery, however, was still fragile, as the company had breezed through four managing directors in three years. Adidas needed a period of stability. Thomas came from Dubai, where he was marketing director for emerging markets, responsible for driving growth in Africa, West Asia, and Turkey. Prior to that, he worked in Japan for more than five years, where he helped set up the Creation Centre in Tokyo. He later led the Adidas brand there, and oversaw the consolidation of the Sport Performance and Sport Style businesses into one homogenous unit. His intimate knowledge of emerging markets and the Adidas brand, as well as his experience in reshaping businesses, made him the outstanding candidate.

Thomas has tapped those qualities to aggressively build the brand in India’s big cities. In “Creating the new”, Adidas Group’s global strategic plan until the year 2020, Roland Auschel, executive board member responsible for global sales, underlines the importance of the metropolis. “Global brands are created in global cities. If we win running in New York and Los Angeles, we will win running in the U.S. Therefore, we are committed to win market and mind share in key cities around the globe,” he says. With its focus on the world’s top urban fashion hubs, Adidas is in great shape again.

IN HERZOGENAURACH, GERMANY, Adidas executives have reason to be happy these days. In 2015, Originals grew by a staggering 36%. It is growing even faster in India, albeit from a low base. “I have never, ladies and gentleman, in all my 29 years at the Adidas Group, witnessed such enthusiasm before,” Herbert Hainer, the retiring veteran chief executive of Adidas Group, told shareholders at the company’s annual meeting earlier this year. (Kasper Rorsted, the current head of German consumer chemicals giant Henkel, will replace Hainer in the beginning of October.)

Hip new Adidas merchandise sells out fast, often in minutes. “750 BOOST GREY WITH GUM SOLE SOLD OUT IN 1 MINUTE,” rapper West boasts on Twitter to his 23.4 million followers on June 11. So it is easy to understand why India may remain some way down the pecking order.

The renaissance for Adidas arguably kicked off in 2013 when the brand lured West away from its old foe Nike. West has been a fiercely loyal advocate of Adidas ever since, openly dissing Nike, or the “other brand” as he disparagingly calls the American brand, as well as touting and sometimes even handing out Yeezys to his legions of fans.

To be certain, everyone in lifestyle footwear and apparel collaborates with musicians and celebrity designers. Nike—which enjoys a substantial lead over Adidas in the U.S., a market that makes up 40% of the global sportswear industry—has tie-ups with rapper Drake, Givenchy designer Riccardo Tisci, and Kevin Hart, the first comedian to be offered a shoe deal. Puma has a multimillion dollar shoe deal with pop star Rihanna. It also recently drew fire from West after signing up Kylie Jenner, the half-sister of the rapper’s wife Kim Kardashian.

Adidas has the hottest ensemble of celebrities, say fashion critics. Hip-hop star Williams has been a huge draw. A couple of years ago, Adidas handed Williams the Superstar, a 45-year-old basketball shoe that rap group Run DMC had customised in 1986, the first known collaboration between a shoe company and musician. (Back then, Run DMC had actually used “My Adidas”, a song they wrote about their affinity for the brand’s shoes, to segue into a contract with the company.) Williams, whose popular single “Happy” has a video for its Indian fans, relaunched the retro kicks in 50 colours, calling the range Supercolors. It was such a stunning hit that Adidas dubbed 2015 “the year of the Superstar”, after selling 15 million pairs worldwide last year. Williams-designed shoes have even outstripped West’s Yeezy line in popularity and importance to Adidas, according to media reports.

Stan Smith, another minimalist classic-white tennis shoe from the ’70s, also had a second wind. They have been ubiquitous on fashion blogs, on the feet of celebrities, and in the hippest corners of the world. “After years of stoically wearing stilettos, in recent times, fashion editors are taking pride in walking in ease, as trainers have become more fashionable–even among the manicured and glossy,” writes Hannah Marriott in an article published in The Guardian about how Céline’s creative director Phoebe Philo almost single-handedly turned Stan Smiths into high fashion. Mona Bijoor, founder of JOOR, a digital marketplace, sums up the phenomenon in a Bloomberg News report on March 3: “The last time I was in Paris, it seemed like every woman I saw was wearing the white-and-green Stan Smiths. Last winter, it was Canada Goose [jackets], now it’s these Adidas sneakers.”

If Paris, the fashion capital of the world, approves, so does the chic shopper in Delhi or Mumbai. “Indian shoppers are far more savvy and knowledgeable about global brands than they are given credit for,” says Thomas. It’s all about branding and image. Adidas is not just a sports shoe company anymore. It is a fashion statement. Thomas says such “premiumisation” is central to his India push. “The idea of selling a Rs 20,000 limited edition lifestyle sneaker was almost laughable when I came to India 18 months ago. But Originals were the hottest selling shoes last year,’’ says Thomas. Impossible, as the Adidas slogan goes, is nothing.

Thomas last year roped in hunky Bollywood actor Ranveer Singh to front the brand. Singh, the poster boy for hipster India, “embodies Originals in every way”, Thomas said at the time. Singh, who has been clicked in several experimental outfits from a full-length skirt to a cherry-coloured suit, represents a changing India, unafraid to flaunt bold, new styles, and willing to splurge on grooming. Feisty cricketer Kohli is another such new-age figure. “[Kohli] is a different animal because he is somebody who is typical of the young India today. He doesn’t hold back on the pitch,” says Damyant Singh, the group’s brand director.

Thomas, or Thommo as his friends and colleagues call him, has put his own stamp on the revival. HR head Sengupta, who has worked with all five managing directors since 2011, says Thomas is very different from his predecessor Haskell, a handsome, suave, Booth School of Business-educated executive. Haskell, whose sartorial taste reflected his refinement, wasn’t as hands on as Thomas, a pugnacious, indefatigable, street-smart rugby player.

Thomas has instilled a culture of camaraderie at Adidas Group. There is no dress code at work; employees are free to turn up in shorts and T-shirts. (Rival brands, however, are strictly forbidden.) Thomas himself often dresses sporty and casual. Regular office parties foster team spirit. His candid approach has been uplifting, says Sengupta.

But Thomas can be a tough boss. He demands punctuality and performance. Anyone who is late for a meeting has to perform pushups (five for every minute). He sets a high bar for employees and sees himself as the “captain-coach” of his team. “My style is not to be a coach who sits in the stands but knee-deep in the field where all the action is. That is why I love India because there is certainly a lot of action and opportunities to improve things,’’ says Thomas.

The Adidas office in Gurgaon has a room full of sports memorabilia, an emotional tribute to an illustrious past, from boxing gloves worn by the late Mohammed Ali to cleats sported by Messi. Sengupta says Adidas employees are encouraged to discuss sports and seek inspiration from sporting achievements. Ali was one such figure for Thomas, who is a capable pugilist himself. After the years of turmoil in India, Adidas could do with someone who can float like a butterfly and sting like a bee. That speed and impact will be needed if the company wants to replicate some of its past glory—Adidas was once the largest shoe company in the world until Nike toppled it in the ’80s. If Thomas is half as successful as his boxing idol, Adidas will surely punch above its weight.