As the controversy over commercialirregularities at Reebok stores in India continue, experts are trying to analyse the reasons behind it. And it is increasingly becoming evident that the franchisee model running for the last few years was not right. This, because some stores were picked up on very high rents as a result lower sales did not match up the store running costs.
After Adidas, the company that now owns Reebok brand announced irregularities at its India arm, has already decided to lower cost and ensure better accountability from its partners. The German sportswear maker, which is undertaking accelerated restructuring of its business activities in India, is in the process of changing its franchise business model for the Reebok brand. It had last year communicated to its Reebok franchisees in India about its intention to discontinue the ‘Minimum Guarantee (MG) model’ in the country.
“Under the new leadership team, the management is undertaking an accelerated restructuring of its business activities, including significant changes to its commercial business practice, as a part of the course of action to protect the group’s interests in India,” Adidas has said. The restructuring is a part of long-term strategic business plan ‘Route 2015’. At present 900 Reebok outlets are operational in India.
As per the MG model, a franchisee retained a part of total sales done by a store to cover the high investment costs of setting and operating an outlet in an expensive location. Under this model, 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 worth crores of rupees, which Reebok was holding back due to under performance.