Roudra Bhattacharya, Priyanka Pani, The Hindu Businessline
“Some stores were picked on very high rental, so the sales were lower than the cost of running the outlet,” says a distributor, who preferred anonymity.
Reebok’s contract with the franchisees worked on a minimum guarantee (MG) basis, which meant that to encourage network expansion, a certain income was guaranteed to each outlet, regardless of sales.
However, this model had the sorry effect of the franchisees getting lazy as they knew that a certain revenue was guaranteed, sources in the distribution chain say.
The more profitable stores ended up cross-subsidising the larger number of loss-making outlets.
As a result of the minimum guarantee deal, the company still has to pay these franchisees dues in crores of rupees nationwide, which Reebok was holding back due to under performance. “Since the last year, the management was trying to change this business model by taking back the MG deal from loss-making outlets, or asking them to close for inability to meet targets. Unfortunately, the accumulated losses of the outlets had become too large, and the European HQ had to take note,” the distributor said.
Last week, Adidas AG had said that commercial irregularities at Reebok brand in India had led to a pre-tax hit of Rs 870 crore, while a restructuring would cost a further Rs 488 crore this year.
The Group had said that a third of the 1,000 Reebok outlets in India would likely be shut, while reports have additionally claimed that a further 200 Adidas outlets may also face the same fate.
A franchisee owner invests anywhere between Rs 40 lakh and Rs 1 crore, depending on the value of the real estate. Noida itself has five Reebok outlets, apart from stores in two malls. In comparison, a shopping area such as New Delhi’s Connaught Place has three outlets within a distance of half a kilometre from each other.
Mr Devangshu Dutta, CEO, Third Eyesight, a retail consultant firm, says most global brands went on an expansion spree during 2004-08.
Several brands were quite optimistic of the Indian growth story and went on to open stores at places they shouldn’t have, he adds.
However, from 2009 onwards several of the stores had started either resizing, closing down or stalling expansion. “Most of the expansion was done keeping in mind the competition in the Indian market and not the demand,” Mr Dutta said.
The Indian market for sports footwear is still largely dominated by unorganised players.
“Franchisees in India are not retailers and know little about retail strategies; they want immediate return on investments and when they don’t get it, they try to cut costs, inventory, working capital and also don’t invest in manpower. This impacts the brand,” he said.
Five Reebok store owners Business Line spoke to around the NCR said that the company is yet to communicate to them officially.
However, the understanding is that the stores operating as ‘factory outlets’ and offering year-long discounts are expected to be closed first.
These stores, which generally sell older stock (from previous seasons), are believed to be leading to a “brand dilution” of Reebok.
“Reebok is positioned as a premium brand, and these stores are affecting the business of the bigger stores which pay high rentals for operating out of the top shopping arcades.
As per our contract, the company is expected to take care of any losses we suffer if our stores close,” said a Reebok store owner in Noida.