Reebok 2007 Annual Report Download - page 111

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ANNUAL REPORT 2007 --- adidas Group
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INDUSTRY CONSOLIDATION RISKS 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
behavior such as price wars. Abnormal product discounting
and reduced shelf space availability from retailers is the most
common outcome of these risks. Sustained promotional pres-
sure in one of the Group’s key markets could threaten the
Group’s sales and profi tability development.
To moderate this risk, we are committed to maintaining a
regionally balanced sales mix and continually adapting the
Group’s distribution strategy. In 2007, we employed this
strategy by instigating a new adidas distribution policy in the
UK. In this market, several years of retail consolidation had
led to inadequate product presentation among retailers. As a
result, we now offer our top product range to retailers who
satisfy more stringent trade policy requirements concerning,
for example, the display of product and training of staff.
Although this strategy had a short-term negative impact on
sales, it signifi cantly improved the brand’s attractiveness
to consumers at point-of-sale and led to a strong sales
improvement in the fourth quarter of 2007.
Despite a more challenging merger and acquisition environ-
ment due to credit market diffi culties, we continue to expect
further consolidation activity among our competitors and retail
partners. This is a result of the strong balance sheets and solid
free cash fl ows within our industry. Therefore, we continue to
see risks from market consolidation as having a medium likeli-
hood and a medium potential impact on both Group sales and
profi tability.
POLITICAL AND REGULATORY RISKS Political and regulatory
risk includes potential losses from expropriation, national-
ization, civil unrest, terrorism and signifi cant 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 fl ow of goods within
the Group and from suppliers. To limit these risks, we utilize
a regionally diversifi ed supplier base which allows us to shift
production to other countries at an early stage if necessary.
 see Global Operations, p. 062
In 2008, we do not foresee major changes to current trade
policies that would have a major adverse effect on our Group.
The Memorandum of Under standing between the EU and China
which enforced quotas on certain apparel categories expired
at the end of 2007. We regard the likelihood of a reintroduction
of quotas as low because both parties have agreed on other
control mechanisms to manage export growth into the EU.
The current apparel quota system between the USA and China
remains in place throughout 2008. In October 2008, the
European Commission will review its anti-dumping measures
on leather shoes imported from countries excluding China
and Vietnam. However, we anticipate exceptions for technical
athletic footwear, which represents the majority of our foot-
wear product offering, to be maintained with only minor adap-
tations. Nonetheless, due to the proactive regional diversifi -
cation of our sourcing portfolio, any unforeseen changes in
the new EU legislation would likely have a very minor fi nancial
effect on our Group. Similarly, we continue to regard the
medium- term risk of further political and regulatory actions
as having a low probability of occurrence. However, an
unexpected signifi cant change in the political or regulatory
environment could have a medium potential fi nancial impact.
LEGAL RISKS 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 confl icts with the rights of third parties. In
February 2006, a major competitor sued the adidas Group for
an alleged infringement of patent rights regarding a range of
footwear models. This litigation was settled amicably in 2007.
Also in 2007, several suppliers and retailers in the athletic
footwear industry, including the adidas Group, were sued for
infringement of two patents relating to footwear designs. The
adidas Group is vigorously contesting the claims in this litiga-
tion. We have also strengthened our Intellectual Property
department resources to drive further enhancements in our
patent portfolio, and in the reviewing and analysis of third party
patents.
Due to the safeguards in place, we believe there is a low likeli-
hood 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 fi nancial impact on our
Group.
RISKS FROM PRODUCT COUNTERFEITING As popular con-
sumer brands which rely on technological and design innova-
tion as defi ning characteristics, the Group’s brands are a
frequent target for counterfeiting and imitation. Over seven
million counterfeit adidas Group products were seized world-
wide in 2007 (2006: more than six million). 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 labeling
with our authorized suppliers, continued development of these
measures remains a high priority for 2008 and beyond.
We regard the likelihood of sustained counterfeiting 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. We continue to assess the
potential risk of counterfeiting to negatively impact our fore-
casted fi nancial contribution as low.