Reebok 2007 Annual Report Download - page 120

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ANNUAL REPORT 2007 --- adidas Group GROUP MANAGEMENT REPORT – OUR FINANCIAL YEAR - Risk and Opportunity Report - Subsequent Events
TAKING CONTROL OF DISTRIBUTION RIGHTS Our brands do
business in virtually all countries around the world. The majority
of our business is done through fully-owned subsidiaries or
sales organizations.  see Group Strategy, p. 044 Nevertheless, in
some markets, we work with distributors or joint venture
partners, in particular at brand Reebok. In doing so, we capi-
talize on third party expertise in terms of how to best service
retailers in those countries. While this strategy can be appro-
priate in a market’s early development, we strongly believe in
having full control over distribution and brand management
in more mature markets. Therefore, it is our Group’s strategy
to buy back distribution rights for our brands when possible
and economically sensible. Over the last several years, we
have been very successful in this respect. After having bought
back distribution rights for the adidas brand in Japan, Italy and
Turkey, we grew signifi cantly in these markets. At Reebok, we
have identifi ed the buyback of distribution rights as the single
most important revenue synergy potential.  see Outlook, p. 118
In 2007, we realized incremental sales in all countries where
Reebok bought back distribution rights. Going forward, we will
evaluate potential buyback opportunities on a case-by-case
basis, considering opportunities as well as inherent risks from
litigation.
MANAGEMENT ASSESSMENT OF OVERALL RISK AND OPPOR
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Central risk management aggregates all risks reported by
brand, regional and headquarter functions. Based on the com-
pilation of risks – taking into account the occurrence likelihood
and potential fi nancial impact and the current business outlook
explained within this report – adidas Group Management does
not foresee any individual or aggregate risks which could
materi ally jeopardize the ongoing business health and viability
of the Group. In comparison to the prior year, some External
and Industry Risks as well as some Strategic and Operational
Risks have increased. All Financial Risks have decreased. As
a result, Management regards the overall risk likelihood as
having increased moderately versus 2007. The potential fi nan-
cial impact from the Group’s overall risk exposure is largely
unchanged, due to increased risk-compensating and transfer
factors now in place.
This assessment is also supported by the continued positive
responses to our fi nancing demands.
 see Treasury, p. 091 The
adidas Group therefore has not sought an offi cial rating by any
of the leading rating agencies.
Management remains confi dent that the Group’s earning
power forms a solid basis for our future business develop-
ment and provides the necessary resource to pursue the
opportunities available to the Group.
COST OPTIMIZATION DRIVES PROFITABILITY IMPROVEMENTS
Continued optimization of key business processes and strict
cost control are vital to achieving high profi tability and return
on invested capital. As a result of the Reebok acquisition, we
generate cost synergies that support adidas and Reebok profi t-
ability development.  see Outlook, p. 118 Nonetheless, our profi t
margins continue to be below those of our main competitors.
We do, however, see numerous levers for streamlining our
cost base going forward. We can further simplify processes
across brands and functions to reduce operational ineffi cien-
cies owed to the increased complexity of our Group. In
North America, we believe we will be able to realize medium-
term economies of scale as we continue to integrate adidas
and Reebok back-offi ce functions. In addition, we strive to
further increase effi ciency in our supply chain and make it
truly demand-driven. By implementing end-to-end planning
processes and improving our replenishment capabilities, we
see opportunities to not only better serve our customers but
also to further reduce our operating working capital needs.
 see Global Operations, p. 062
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FAVORABLE FINANCIAL MARKET CHANGES Favorable
exchange and interest rate developments can potentially have
a positive impact on the Group’s fi nancial results. Our Group
Treasury department closely monitors the fi nancial markets to
identify opportunities.