For the exclusive use of A. Gansauer, 2020. IMD820 V. 31.05.2017 ADIDAS RUSSIA/CIS AND THE RUSSIAN CRISIS: RETRENCH OR DOUBLE DOWN (A) Beverley Lennox prepared this MOSCOW (RUSSIA), MARCH 2015. The Russian economy was in a case under the supervision of tailspin. The combination of a sharp decline in oil prices, a weak ruble, Professors Carlos Cordón, the the political fallout from the forceful annexation of Crimea, Western LEGO Professor of Strategy and sanctions and inflationary pressures had all contributed to an economic Supply Chain Management, and crisis (refer to Exhibit 1). It was the “perfect storm” if there ever was one Benoît Leleux, the Stephan and the results were predictable: dramatically lower consumer and Schmidheiny Professor of investment spending. Entrepreneurship and Finance, as a basis for class discussion Against this backdrop, Joseph Godsey, the vice president of supply chain rather than to illustrate either management and information technology at adidas Russia/CIS (which effective or ineffective handling included Ukraine and Kazakhstan), and his team were preparing for a key of a business situation. “Strategy 2020” meeting with adidas headquarters and the Operations Excellence steering committee later in the month. Their discussion would center on what should be their priorities and the pace of implementation for the next 12 months. Five key initiatives – click-and-collect, customization, endless aisle, radio-frequency identification (RFID)-enabled stores and warehouses, and ship-from-store – would be on the table. These initiatives would mix online, offline and mobile approaches, and they would involve a radical rethink of adidas Russia/CIS’s supply chain management (SCM) policies. They would also require significant investments. Since arriving in Russia at the beginning of 2014, Joseph and his team had made great strides in improving the efficiency of adidas Russia/CIS’s IT systems; and with over 1,200 corporate-owned stores employing more This case won the Supply than 15,000 people, Russia/CIS was becoming increasingly more Chain Management category important to the business. In fact, over the years, adidas Russia/CIS had in the 2016 EFMD case continuously met or exceeded expectations and had gained sufficient writing competition. credibility within the organization. As a result, it was now tasked with defining the future of adidas’s omnichannel retailing, a combination of digital and physical commerce that held the power to transform the customer experience into a seamless journey supported by the integration between channels on the back end. Joseph attributed the successes his team enjoyed during his first year at adidas Russia/CIS to the entrepreneurial mindset of the organization, a willingness to take “calculated” risks and the team’s ability to move fast. But Joseph was now about to take the biggest risk of his career and he was not so sure it was a calculated one. With the Russian economy taking a definite turn for the worse, was it really time to engage in major IT and SCM investments? Were Russian customers ready for such leading-edge offers? Could Russia/CIS actually become a beacon of excellence in retail IT and supply chain management within the adidas Group? Copyright © 2016 by IMD - International Institute for Management Development, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior written permission of IMD. This document is authorized for use only by Anna Christina Gansauer in MAN6617 Summer 2020 taught by JANICE CARRILLO, University of Florida from Jul 2020 to Dec 2020. For the exclusive use of A. Gansauer, 2020. - 2 - IMD-7-1795 adidas Group In the small German village of Herzogenaurach, located 12 miles northwest of Nuremberg, Adolf “Adi” Dassler registered “Adi Dassler adidas Sportschuhfabrik” on August 18, 1949, following a family feud at the Gebrüder Dassler Schuhfabrik between him and his older brother Rudolf. Rudolf had earlier established Puma, which was also headquartered in Herzogenaurach and which quickly became the business rival of adidas. At the 1954 World Cup final, when the German national football team, wearing lightweight adidas football boots with screw-in studs and the iconic three stripes, faced the unbeatable Hungarians, the Germans’ The young Adi Dassler in his victory made adidas a household shoe factory name on football pitches Source: adidas website everywhere. Source: adidas website Adi’s son, Horst Dassler, eventually took the reigns of the company, but after his sudden death in 1987, the company entered troubled waters. It was first acquired in 1989 by French industrialist Bernard Tapie for a reported €244 million, which Tapie mostly borrowed. Famous for rescuing bankrupt companies, Tapie decided to move production offshore to Asia. A record loss in 1992 brought adidas to its knees, and ultimately, it was taken over by its main bank, French state- owned Crédit Lyonnais, which then engineered a sale to financier Robert Louis-Dreyfus and other private equity investors in 1993. Robert Louis-Dreyfus, as the company’s new CEO, and his partner Christian Tourres, turned the company around and took it public in 1995. Over time, the adidas Group (refer to Exhibit 2) evolved into a global leader in the sporting goods industry with a broad portfolio of products available in virtually every country in the world. In 2013, however, the Group reported that its sales and earnings targets for the year were no longer achievable due to negative market developments, which included the effects of a weakening currency, the ongoing softness of the global golf market and unexpected short- term distribution constraints that resulted in the transition to a new distribution facility in Russia. adidas Russia/CIS For 10 years, Russia/CIS1 was one of the most important markets for the adidas Group with constantly rising sales and profits (refer to Exhibit 3). For the five years prior to 2013, the market was growing 30% to 100% a year, with Russia often rolling out 200+ stores per year. Joseph described the pace of growth as “simply insane.” In 2012, as increasing wages in emerging markets supported consumption, Russia/CIS was identified as a key growth market and one of three “attack markets” within the adidas Group, alongside North America and Greater China. The three attack markets were expected to contribute around 50% of the adidas Group total growth under the company’s “Route 2015” plan, with each market targeting a double-digit compound annual growth rate. 1 CIS is the common acronym for the Commonwealth of Independent States, a regional organization formed during the breakup of the Soviet Union with nine of the 15 former Soviet Republics. This document is authorized for use only by Anna Christina Gansauer in MAN6617 Summer 2020 taught by JANICE CARRILLO, University of Florida from Jul 2020 to Dec 2020. For the exclusive use of A. Gansauer, 2020. - 3 - IMD-7-1795 adidas Russia/CIS, under the leadership of managing director Martin Shankland, enjoyed a great deal of autonomy. In Martin’s words: When KPMG seconded me to audit adidas Russia/CIS in 1996, I felt like I had landed on the moon, and it was great. I was only supposed to stay for three months, but on the second day, I knew this is where I wanted to be. I was supposed to stay with KPMG in Russia for two years, but half way through that term, I began working for adidas. There was an incredible sense of optimism. This is where I felt I could realize myself. It was a place where I felt I could do the things that I was capable of, which, in a way, is always more difficult in a developed, established market where the rules are all worked out. adidas Russia/CIS appeared to be a place with lots of opportunity and not many rules. Martin played an instrumental role in moving Russia/CIS from a wholesale to an own-retail business model, which proved to be a competitive advantage for adidas in Russia. By 2012, it had about 1,000 stores in the country, with plans to open around 150 additional stores during the year, representing over 90% of the total business. In comparison, in 2008, the company had around 650 stores, representing 70% of adidas/CIS business. Competitors that did not have their own retail stores would find it more difficult to offer a seamless omnichannel experience. Conversely, Russia could leverage its own retail stores, which focused on full-price sell through2 and were deemed one of the main growth drivers for the next years. As Martin explained: adidas Russia/CIS was mainly a distribution business, but after the 1998 Russian financial crisis, wholesalers were left with no capital. They owed us huge amounts of money and were simply unable to repay. That forced a new era on the company. Prior to the crisis, the thinking was that relying on wholesalers and putting a limited amount of our own infrastructure on the ground would limit our country exposure. The crisis made it clear that operating a wholesale business model was anything but low risk. The good news was that the market indeed had tremendous potential and it picked up pretty quickly after the crisis. At that point, we focused on the brand and how it was represented at the point of sale. Initially, the general standards of merchandising, customer service, etc. were low; we wanted our brand to be presented in line with the global image of adidas. I realized that even though we knew next to nothing about retailing, we didn’t know any less than our distributors. In other words, it could not get worse if we started our own retail business, so we started to open stores one by one.