Risk and Opportunity Report

The adidas Group continuously explores and develops opportunities to sustain and maximise earnings and also to drive long-term increases in shareholder value. In doing so, we acknowl­edge that it is necessary to take certain risks to maximise business opportunities. Our risk and opportunity management principles provide the framework for our Group to conduct business in a well-controlled environment. 

Risk and opportunity management principles

The adidas Group is regularly confronted with risks and oppor­tunities which have the potential to negatively or positively impact the Group’s asset value, earnings, cash flow strength, or intangible values such as brand image. We have summarised the most important of these risks and opportunities in this report in three main categories: External and Industry, Strategic and Operational, and Financial.

We define risk as the potential occurrence of external or inter­nal events that may negatively impact our ability to achieve short-term goals or long-term strategies. Risks also include lost or poorly utilised opportunities.

Opportunities are broadly defined as internal and external strategic and operational developments that have the potential to positively impact the Group if properly exploited.

Risk and opportunity management system

To facilitate effective management, we have implemented an integrated management system which focuses on the identification, assessment, treatment, controlling and reporting of risks and opportunities. The key objective of this system is to protect and further grow shareholder value through an opportunity-focused, but risk-aware decision-making framework.

We believe that risk and opportunity management is optimised when risks, risk-compensating measures and opportuni­ties are identified and assessed where they arise, in conjunc­tion with a concerted approach to controlling, aggregating and reporting. Therefore, risk and opportunity management is a Group-wide activity, which utilises critical day-to-day management insight from local and regional business units. Support and strategic direction is provided by brand and global functions. Centralised risk management is responsible for the alignment of various corporate functions in the risk and opportunity management process and coordinates the involve­ment of the Executive and Supervisory Boards as necessary. Centralised risk management is also responsible for providing line management with relevant tools and know-how to aggre­gate and control risks and opportunities utilising a consistent methodology.

Of significant importance is our Group’s Risk Management Manual, which is available to all Group employees online. The manual outlines the principles, processes, tools, risk areas and key responsibilities within our Group. It also defines reporting requirements and communication timelines. Our Group supplements this top-down, bottom-up approach to risk and opportunity management by employing our Global Internal Audit department to independently assess and appraise operational and internal controls throughout the Group.

Corporate risk overview

External and industry risks

Macroeconomic risks

Consumer demand risks

Industry consolidation risks

Political and regulatory risks

Legal risks

Risks from product counterfeiting and imitation

Social and environmental risks

Natuaral risks

Strategic and operational risks

Portfolio integration risks

Risks from loss of brand image

Own-retail risks

Risks from rising input costs

Supplier default risks

Product quality risks

Customer risks

Risk from loss of key partnerships

Product design and development

Personnel risks

Risks from non-compliance

IT risks

Financial risks

Credit risks

Financing and liquidity risks

Currency risks

Interest rate risks

Corporate opportunities overview

External and industry opportunities

Favorable macroeconomic and fiscal developments

Sports participation on the rise

Increasing demand for functional apparel

Women's segment offers long-term potential

Ongoing fusion of sport and lifestyle

Emerging markets as long-term growth drivers

Growing popularity of "green" products

Strategic and Operational Opportunities

Strong market positions worldwide

Multi-brand approach

Personalisation and customisation replacing mass wear

Breaking new ground in distribution

Taking control of distribution rights

Cost optimisation to drive profitability improvements

Financial Opportunities

Favorable financial markets changes

The main components of our risk and opportunity management process are:

		Risk and opportunity identification:The adidas Group con­tinuously monitors the macroeconomic environment, develop­ments in the sporting goods industry, as well as internal pro­cesses to identify risks and opportunities as early as possible. Local and regional business units have primary responsibility for the identification and management of risk and opportu­nities. Central risk management has defined a catalogue of potential risks and opportunities for our Group to assist in the identification process. In addition to the potential financial impacts from changes in the overall macroeconomic, political and social landscape, each business unit actively monitors brand, distribution channel and price point developments in our core sport, leisure lifestyle and sport fusion markets. A key element of the identification process is primary qualitative and quantitative research such as trend scouting, consumer sur­veys and feedback from our business partners and controlled space network. These efforts are supported by global market research and competitor analysis. Here, secondary material such as NPD Sports Tracking Europe market research data is analysed and global relationships with independent trend and media agencies such as Trendwatching.com are main­tained. Through this process we seek to identify the markets, categories, consumer target groups and product styles which show most potential for future growth at a local, regional and global level. Equally, our analysis focuses on those areas that are at risk of saturation, increased competition or changing consumer tastes.
		Risk and opportunity assessment: Identified risks and opportunities are assessed with respect to (1) occurrence probability, and (2) potential contribution to loss or pro. t, with contribution being defined as operating profit before intra-Group royalties. The occurrence probability of individual risks and opportunities is evaluated on a scale of 0 to 100% likelihood. In this report, we summarise these findings by utilising “high”, “medium” or “low” classifications to represent an aggregate likelihood for various risk and oppor­tunity categories. As risks and opportunities have different characteristics, we have defined separate methodologies for assessing the potential financial impact. With respect to risks, the extent of potential loss is measured on a case-by-case basis as the contribution deviation from the most recent fore­cast under the assumption that the risk fully materialises. This calculation also reflects the effects from risk- compensating measures. In assessing the potential contribution from opportunities, each opportunity is appraised with respect to viability, commerciality, potential risks and the expected profit contribution. This approach is applied to longer-term strategic prospects but also to shorter-term tactical and opportunistic initiatives at both the Group and, more extensively, the brand level.
		Risk and opportunity treatment: Risks and opportunities are treated in accordance with the Group’s risk and opportunity management principles as described in the Risk Management Manual. Line management in cooperation with central risk management and, in exceptional cases, the Executive Board and /or Supervisory Board, decides which individual risks we accept or avoid and the opportunities to pursue or forgo. As part of this process, we also decide on which risk-compensating or transfer measures will be implemented. Similarly, to maximise opportunities, it may be necessary to reduce or limit distribution to protect prices and margins or prolong product lifecycles. In some cases, we also seek to transfer the responsibility or execution for certain risks and opportunities to third parties (e.g. insurance, outsourcing, distribution agreements or brand sub-licensing).
		Risk and opportunity monitoring and controlling: A primary objective of our integrated risk and opportunity management system is to increase the transparency of Group risks and opportunities. In addition, we also seek to measure the success of our risk-compensating initiatives. The Group centrally monitors each of these efforts on a frequent basis. In particu­lar, central risk management regularly examines the results of actions taken by operational management to accept, avoid, reduce or transfer risks over time. With respect to opportu­nities, we regularly monitor the objectives and key performance indicators established during the initial identification and evaluation process. This not only facilitates the validation of opportunities but also allows us to adapt and refine our products, communication and distribution strategy to ongoing developments in our rapidly changing marketplace. In particu­lar, we collaborate with our manufacturing partners and retail customers to evaluate the impact of our growth and efficiency initiatives. Feedback is relayed in a timely manner to product, marketing and controlling functions.
		Risk and opportunity aggregation and reporting: Central risk management aggregates Group-wide risks and reports them to the Executive Board on a regular basis. Individual risks are aggregated based on the sum of all assessed risks (sum of occurrence likelihood × potential net loss), taking correlations between individual risks into account. Risks with a likely impact of at least € 1 million on the forecasted full year contribution are reported to central risk management on a monthly basis. In addition, risks with a likely financial impact of € 5 million or more are required to be reported immediately upon identification to central risk management. Opportunities are aggregated separately as part of the strategic business planning, budgeting and forecasting processes. The realisation of risks and opportunities can have a critical impact on our ability to achieve our strategic objectives. Therefore, Management is updated in regular business reviews, but also through ad hoc discussions as appropriate.

Management assessment of overall risk and opportunities

Central risk management aggregates all risks reported by brand, regional and headquarter functions. Based on the com­pilation of risks – taking into account the occurrence likelihood and potential financial impact and the current business outlook explained within this report – adidas Group Management does not foresee any individual or aggregate risks which could materially jeopardise the viability of the Group as a going con­cern. Management remains confident that the Group’s earnings power forms a solid basis for our future business development and provides the necessary resource to pursue the opportuni­ties available to the Group.

Nonetheless, due to the current financial market and exchange rate volatility as well as uncertainty over the magnitude of spillover effects on private consumption, we believe that our risk profile has increased in comparison to the prior year. This reflects increases in both likelihood of occurrence and potential financial impact of certain individual risks as outlined in this report.