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Post-Scandal Look At Adidas

Summary

Adidas was recently involved in pay-for-play NCAAM scandal.

Look at the legal situation.

Look at the implications for the overall business.

In the wake of the recent college basketball scandal that involved adidas, the ultimate impact on the overall basketball landscape and on the corporations involved is still unclear. Though a few individuals, including senior adidas executive John Gatto, face charges for the conspiracy thus far, the schemes likely involved others who currently remain uncharged. This is one obvious risk to adidas: if additional and more powerful members of management were complicit, there would be a potential fraud, embezzlement, or bribery cases in a widespread manner. Currently, adidas has not indicated that anyone besides Mr. Gatto was involved. As this scenario remains conjecture, however, it is more important to look at the impact based on the facts already known.

Adidas has seen tremendous growth in the sneaker market over the past few years. After lagging behind Under Armour with a market share of about 4% in 2015, adidas now has 11.3% of the market. These sales have been propelled by new endorsement deals, including James Harden, and collaborations with high fashion brands and celebrities, such as Alexander Wang and Kanye West. Another telling statistic comes from TheStreet, which asserts that adidas has 25 of the top 60 shoes this year, after only having 2 of the top 60 last year. When considering the impact of the scandal, an important thing to note is that adidas has recognized and exploited the sudden popularity of casual sneakers. Basketball sneakers have faded out of style for everyday life, and adidas was well positioned to take advantage. In light of the scandal, this implies that if consumer preferences continue to shift towards athleisure footwear, losses in their basketball line would not be too detrimental.

Even though basketball revenues are a small portion of their overall sales, it is important for adidas to retain their endorsement deals and sponsorships. Contracts with schools and universities include merchandising opportunities, including official branded apparel sold to the public. These sales serve to build brand loyalty in young consumers. Additionally, the exposure on TV and social media help build brand awareness. The scandal risks the pending $191M deal with Kansas, as school officials have not signed documents affirming an oral agreement that occurred before the news broke. The later allegations that adidas attempted to funnel the number one 2018 recruit, Zion Williamson, to Kansas cannot help the company persuade Kansas. Louisville has also publicly stated that it will be reevaluating its agreement. As adidas often settles for foreign players or players from mid-major schools, losing these two powerhouses, who have produced current adidas players Joel Embiid and Andrew Wiggins, would be a major blow.

Last, the impact on the perceived tone of management should be contemplated. Whether or not others were involved, Mr. Gatto was clearly incentivized to undertake his actions. A performance-focused management that emphasizes results is one element of the fraud triangle. There have been no signs of impropriety within any other segment of adidas’s business, but Mr. Gatto had the pressure and opportunity to bribe high school players. Overall, the scandal should not impact adidas too much, as losses within the basketball business unit would not have a large impact on the overall bottom line.

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