Growth in the sporting goods industry is influenced by consumer spending and consumer confidence. Abrupt economic downturns, in particular in regions where the Group is highly represented, therefore pose a significant short-term risk to sales development. ...

Growth in the sporting goods industry is influenced by consumer spending and consumer confidence. Abrupt economic downturns, in particular in regions where the Group is highly represented, therefore pose a significant short-term risk to sales development. To mitigate this risk, the Group strives to balance sales across key global regions and also between developed and emerging markets. In addition, a core element of our performance positioning is the utilisation of an extensive global event and partnership portfolio where demand is more predictable and less sensitive to macroeconomic influence.
In 2010, the Group expects the global economy to grow modestly after the global recession of the prior year. Nevertheless, a high degree of uncertainty prevails in expectations regarding the pace and magnitude of economic recovery. Performance per geographic region is also expected to be mixed. Therefore, we continue to assess the likelihood that adverse macroeconomic events could impact our business as high. We also still assess the potential financial impact of such events as high.

Failure to anticipate and respond to changes in consumer demand for sporting goods products is one of the most serious threats to our industry. ...

Failure to anticipate and respond to changes in consumer demand for sporting goods products is one of the most serious threats to our industry. Consumer demand changes can be sudden and unexpected, particularly in our fashion-related businesses. Because industry product procurement cycles average 12 to 18 months, the Group faces a risk of short-term revenue loss in cases where it is unable to respond quickly to such changes. Even more critical, however, is the risk of continuously overlooking a new consumer trend or failing to acknowledge its potential magnitude over a sustained period of time.
To mitigate this risk, identifying and responding to consumer demand shifts as early as possible is a key responsibility of our brands. In this respect, we utilise extensive primary and secondary research tools as outlined in our risk and opportunity identification process.
As a leader in our industry, our brand strategies continue to be focused on influencing rather than reacting to the changing consumer environment. We invest significant resources in research and development to innovate and bring fresh new technologies and designs to market.
In addition, we also seek to enhance consumer demand for our brands and brand initiatives through extensive marketing, product and brand communication programmes. And we continue to focus on supply chain improvements to speed up creation-to-shelf timelines. In 2010, the adidas Group will continue to bring new product innovations to market, supported by extensive brand marketing campaigns.
Given the broad spectrum of our Group’s product offering, retailer feedback and other early indicators, we view the overall risk from consumer demand shifts as unchanged versus the prior year. Changes in consumer demand continue to have a medium likelihood of occurrence and could have a potential medium impact on our Group’s financial results.

The adidas Group is exposed to risks from market consolidation and strategic alliances amongst competitors and/or retailers. This can result in a reduction of our bargaining power, or harmful competitive behaviour such as price wars. ...

The adidas Group is exposed to risks from market consolidation and strategic alliances amongst competitors and/or retailers. This can result in a reduction of our bargaining power, or harmful competitive behaviour such as price wars. Abnormal product discounting and reduced shelf space availability from retailers are the most common potential outcomes of these risks. Sustained promotional pressure in one of the Group’s key markets could threaten the Group’s sales and profitability development.
To moderate this risk, we are committed to maintaining a regionally balanced sales mix and continually adapting the Group’s distribution strategy. The negative real economy effects from the economic downturn and the uncertain outlook for 2010 are expected to put further pressure on the sporting goods industry to consolidate. Moreover, with improving credit market conditions the merger and acquisition environment is expected to improve slightly. Many retailers and competitor positions have weakened due to declining sales and earnings during the prior year. Therefore, we continue to see risks from market consolidation as having a high likelihood of occurrence. We continue to view the potential impact on both Group sales and profitability as medium.

Political and regulatory risks include potential losses from expropriation, nationalisation, civil unrest, terrorism and significant changes to trade policies. ...

Political and regulatory risks include potential losses from expropriation, nationalisation, civil unrest, terrorism and significant changes to trade policies. In particular, the adidas Group faces risks arising from sudden increases of import restrictions, import tariffs and duties that could compromise the free flow of goods within the Group and from suppliers.
To limit these risks, we proactively utilise a regionally diversified supplier base which establishes a certain protection against unforeseen changes in regulations and also allows us to shift production to other countries at an early stage if necessary.
At the end of 2008, nearly all apparel-specific safeguard measures against China expired based on the World Trade Organization (WTO) accession agreements. However, various governments sought protection against footwear imports by applying trade defence instruments, such as anti-dumping measures, on a broader scale. For example, Brazil and Argentina recently introduced higher import duties on footwear imports from China on a preliminary basis. These duties are expected to negatively impact our gross margin in 2010. Similarly, in December 2009, the European Union extended the existing anti-dumping measures against leather-upper footwear from China and Vietnam for a period of fifteen months.
As a result of heightened protectionist activity by governments, we now regard the risk of further political and regulatory actions as having a medium probability of occurrence versus a low probability in our prior year assessment. An unexpected significant change in the political and regulatory environment could have a medium potential financial impact.

The adidas Group is exposed to the risk of claims and litigation for infringement of third-party trademark, patent and other rights. ...

The adidas Group is exposed to the risk of claims and litigation for infringement of third-party trademark, patent and other rights. To reduce this risk, new product technologies, designs and names are carefully researched to identify and avoid potential conflicts with the rights of third parties. We have further strengthened our Intellectual Property department resources to drive enhancements in our patent portfolio, and in the reviewing and analysis of third-party patents.
Due to the safeguards in place, we believe there continues to be a low likelihood of our Group infringing third-party trademark or patent rights in a material way. Nevertheless, we continue to believe that litigation could have a medium financial impact on our Group.
Due to the safeguards in place, we believe there continues to be a low likelihood of our Group infringing third-party trademark or patent rights in a material way. Nevertheless, we continue to believe that litigation could have a medium financial impact on our Group.

As popular consumer brands which rely on technological and design innovation as defining characteristics, the Group’s brands are a frequent target for counterfeiting and imitation. ...

As popular consumer brands which rely on technological and design innovation as defining characteristics, the Group’s brands are a frequent target for counterfeiting and imitation. To reduce the loss of sales and the potential reputation damage resulting from counterfeit products sold under our brand names, the adidas Group makes use of extensive legal protection (generally through registration) and works closely with law enforcement authorities, investigators and outside counsel. Although we have stepped up measures such as product security labelling with our authorised suppliers, continued development of these measures remains a high priority for 2010 and beyond.
As in the prior year, over eight million counterfeit adidas Group products were seized worldwide in 2009.
We continue to regard the likelihood of sustained counterfeiting and imitation as high in the short and medium term. However, we believe we have adequate costs budgeted to support our ongoing efforts to successfully combat counterfeiting and imitation. We continue to assess the potential risk of counterfeiting and imitation to negatively impact our forecasted financial contribution as low.

We have a continuing responsibility to our workers, suppliers and the environment. Malpractice in these areas, in particular human rights violations and dubious employment practices, can have a significant impact on the reputation and operational efficiency of our Group and our suppliers. ...

We have a continuing responsibility to our workers, suppliers and the environment. Malpractice in these areas, in particular human rights violations and dubious employment practices, can have a significant impact on the reputation and operational efficiency of our Group and our suppliers. To limit this risk, we have established workplace standards to which suppliers must conform before and during business relationships with the Group. Internal inspections of supplier factories verified by extensive independent audits are conducted regularly. In the event of non-compliance with these standards, we develop joint action plans and set deadlines for compliance and further improvement. If these deadlines are not met, business relations are terminated (see also www.adidas-Group.com/sustainability). In order to minimise the environmental impact of producing and distributing our products, in 2009 the adidas Group continued to proactively engage in developing more environmentally sustainable products which included the first products from our “Better Place” programme. In 2010, we intend to grow the share of sustainable products by intensifying our “Better Place” initiatives within all sports categories of the adidas Sport Performance division. As a result, we continue to regard the risk of social and environmental malpractice as likely in only isolated cases and we believe the potential financial impact remains low.

The adidas Group is exposed to external risks such as natural disasters, epidemics, fire and accidents. Further, physical damage to our own or our suppliers’ premises, production units, warehouses and stock in transit can lead to property damage and business interruption. ...

The adidas Group is exposed to external risks such as natural disasters, epidemics, fire and accidents. Further, physical damage to our own or our suppliers’ premises, production units, warehouses and stock in transit can lead to property damage and business interruption. These risks are mitigated by ample loss prevention measures such as working with reliable suppliers and logistics providers who guarantee high safety standards and disaster recovery plans. In addition to the considerable insurance coverage we have secured, the Group has also implemented contingency plans to minimise potential negative effects.
Our overall assessment of this risk is unchanged versus the prior year. As a result, we believe the likelihood of natural risks is low and expect only minor financial loss after insurance compensation should natural risks materialise.