Strategic Risks
Portfolio Risks
The adidas Group faces risks due to contractual obligations following
business divestitures and with regard to the integration of newly
acquired businesses. In our ongoing initiatives to integrate the Reebok
brand, we face a risk of overestimating potential revenue and cost
synergies as well as execution risks. The latter relate for example to
the harmonization of the Group’s IT systems and the standardization of
functional business processes across the different brands. To mitigate
these risks, we have implemented a dedicated controlling function and
an integration management office continuously overseeing our
integration activities. The realization of the first projected cost
synergies in 2006 gives us higher confidence in the likelihood of
achievement of our medium-term synergy targets (see Subsequent Events and Outlook).
In addition, formal employee surveys conducted throughout 2006 as part
of our Reebok integration activities suggest high satisfaction rates
and a positive cultural fit between employees at each of our brands (see Employees).
We therefore believe there is a low likelihood of portfolio risk
occurrence. Due to the magnitude of projected synergies, however, we
regard the potential financial impact of these risks as high.
Risks from Loss of Key Promotion Partnerships
The adidas Group faces risks from the loss of major promotion
partnerships which play an important role in building brand image and
generating sales of licensed product. To mitigate the inherent risk, we
follow the strategy of broadening the Group’s portfolio of premium
partnerships in order to reduce the reliance on single affiliations. As
a result, we assess the potential financial impact of this risk to be
low, whereas the likelihood of occurrence is medium.
Brand Image Risks
A shift in consumer taste away from performance products could
adversely affect our Group as our product portfolio is weighted towards
performance-oriented styles. We mitigate this risk by following a
multi-brand strategy with brands that address distinct
performance-oriented consumer segments as well as product offerings
targeting lifestyle-oriented consumers. Nonetheless, a significant
restriction in the usage of the Three Stripes symbol in sport
competition, for example, could potentially harm our brand recognition
value and negatively affect the image of brand adidas. We have
mitigated this risk with the successful negotiation of long-term
solutions with the sport federations most important for us during the
last two years. We hence regard the likelihood of further restrictions
in the usage of the Three Stripes, which could potentially have a
significant financial impact, as low.
Research and Development Risks
In the sporting goods industry, the speed with which new product
technologies are brought to market is decisive. If the adidas Group
failed to constantly develop innovative products, we would risk a
significant sales decline as innovative products generate strong sales
and more importantly create a halo effect for other products. Due to
our industry-leading innovational strength (see Research and Development), we assess the occurrence probability of this risk, which could potentially have a significant financial impact, as low.
Product Quality Risks
The adidas Group faces a risk of selling defective product, which may
result in injury to consumers and image impairment. We mitigate this
risk through rigorous testing prior to production, close cooperation
with manufacturers throughout the fabrication process, open
communication about defective products and quick settlement of product
liability claims if necessary. The financial consequences of potential
product liability cases, whose likelihood of occurrence we regard as
low, could have a medium impact.
Own-Retail Risks
New adidas, Reebok and Rockport own-retail stores require considerable
up-front investment in furniture and fittings as well as ongoing
maintenance. In addition, own-retail activities often require
longer-term lease or rent commitments as well as significantly more
personnel in relation to net sales than our wholesale business. This
comparably less flexible cost structure implies a risk in cases of
significant unexpected sales declines, as such declines cannot be
immediately compensated by cost reductions. The Group minimizes this
risk by only entering into lease contracts with a duration of less than
ten years. In addition, all shops must fulfill ambitious profitability
targets dependent on size, location and investment in the store. If
these targets are not met, we undertake restructuring measures and
eventually close unprofitable locations. We assess own-retail risks as
medium with regard to their likelihood of occurrence, but low in terms
of their potential extent of loss.
Personnel Risks
The adidas Group’s future success is highly dependent on our employees
and their talents. We thus face the risk of being unable to identify,
recruit and retain the most talented people that best meet the specific
needs of our Group. To reduce the risk of not being able to recruit
qualified staff, to enable our employees to make use of their full
potential and to retain key personnel, we strongly engage in developing
a motivating working environment, attractive reward and incentive
schemes as well as long-term career opportunities to make the adidas
Group the employer of choice within our industry (see Employees).
As a result, we regard the likelihood of occurrence of these risks,
which could have a medium financial impact should they materialize, as
limited.
