The conflict between the Adidas Group and its former general manager in India is heating up, with Indian newspapers reporting allegations that two leading executives stole products by setting up four secret warehouses in Delhi and generating fictitious sales. They referred to a First Information Report (FIR) reportedly filed by the Adidas Group to police in Gurgaon, outside Delhi, where Adidas India is located.
The two executives in question are Subhinder Singh Prem, longtime general manager of Reebok India and general manager of the Adidas Group in India for about a year until his sudden termination in March; and Vishnu Bhagat, former chief operating officer. The Adidas Group said only that it had uncovered “commercial irregularities” that would have a pre-tax impact worth an estimated €125 million over several previous years. Singh has hit back with two lawsuits, one for defamation and another for recovery of unpaid compensation, which are expected to be handled by the Delhi High Court in July. The case is drawing ample media attention in India, where Singh is a very well-known business figure – an ebullient Sikh entrepreneur who turned Reebok into the leading sports brand in India.
As Indian newspapers reported in the last days, Singh and Bhagat allegedly conspired to invoice sales for products that were diverted to the irregular warehouses. Other allegations reportedly featuring in the criminal complaint filed in Gurgaon are that the two executives ran an unauthorized franchise program, fabricated cash receipts and held parallel books of accounts.
However, Singh's side of the conflict was described in an article by Forbes India. It all started at an international meeting in Arizona in March, where Singh was to discuss a business plan for the Indian market. Instead, Singh was asked to resign. He flew straight back to Delhi and sent his resignation letter, only to be told he had been fired for a reason.
As Singh explained it, the crux of the matter was a disagreement about Reebok India's business approach, in a market where international sports brands mostly sell their products through franchised stores. As a means to quickly develop, in locations with sometimes uncertain prospects, Reebok India offered a minimum guarantee to its franchisees, arguing that this had become common practice in India (and that the Adidas brand had started adopting the same tactics). But Reebok's growth strategy appeared overly aggressive, and some of the 1,000 franchised stores were unprofitable.
The issue became all the more pressing as Reebok's sales started to suffer last year. Forbes India reports that, while the Adidas brand is still loss-making in India, Reebok India ended the fiscal year 2011 with a profit of 500 million rupees (€7.1m-$8.9m) on sales of 7 billion rupees, but these sales declined to 6.5 billion rupees (€92.6m-$115.2m) in the latest fiscal year. This was explained through a hike in the excise duty on apparel, an increase in value-added tax and exchange rate changes that increased costs.
Most disturbingly, Forbes India continued, Singh and the Adidas Group disagreed about the way forward. As part of its Route 2015 plan, the Adidas Group wanted its Indian subsidiary to quit pursuing growth at all costs, and to focus more on profits. The group advocated changes in business practices that would probably lead to the closure of hundreds of franchised stores. On the other hand, Reebok favored a more gradual approach to protect its retail franchisees.
The Adidas Group declined to comment on the details of the conflict while the investigation is ongoing, and again insisted that the issues related only to Reebok India, not affecting the Adidas brand in the country. The group intends to provide more details on its strategic plans in India in the coming months.
