College Basketball

Bad Time for a Scandal

81759804 Adidas Rorsted
The unfolding scandal could complicate CEO Kasper Rorsted's efforts to make further inroads in the US. Source: Reuters

It’s been a long time coming – three years of investigating to be exact. On Tuesday, US prosecutors in New York revealed they have arrested 10 people on charges of bribery, corruption and fraud involving budding college basketball stars. Adidas, the German sportswear giant, is at the center of the scandal – and it couldn’t have come at a worse time.

The retailer is accused of bribing young basketball players and coaches to steer them towards universities that Adidas sponsors. James Gatto, a senior executive in charge of basketball marketing in the United States, and two other Adidas officials are among those indicted, along with four coaches that allegedly took the bribes.

A spokeswoman for Adidas confirmed that one of their officials had been arrested. The company said it is still seeking more information and has no knowledge of any wrongdoing, though it has promised to cooperate with authorities, the spokeswoman added.

Whether Adidas is really the only sportswear company that took such drastic steps in America’s cutthroat basketball market remains to be seen. Until the story unfolds further, it’s not a good look for investors.

The company's sharp rise in the United States has been "one of the most phenomenal things we've ever seen."

The scandal comes at a bad time for Adidas. Europe’s largest sports retailer has been making major inroads into the United States, where rival and world leader Nike dominates. College basketball is a billion-dollar industry, which has become all the more important to Adidas since it ended a sponsorship deal with the NBA, basketball’s top professional league. Nike took over sponsorship at the end of last year.

Investors are worried. Shares of Adidas fell 2.5 percent on the news Tuesday afternoon in Frankfurt, making it the worst performer on the day in the blue-chip DAX index. That’s because expanding the North American business has been at the top of Adidas Chief Executive Kasper Rorsted’s agenda.

Adidas has been trying to boost its US presence for more than two decades. But Mr. Rorsted, who has been the company’s CEO since October, has been showing surprising signs of success. Adidas’s revenue in the United States surged nearly 30 percent in the second quarter of this year to around €1 billion. Nike still dominated with €3.3 billion ($3.9 billion) in sales in the last quarter, but that was actually down 3 percent from the previous year according to new figures released Tuesday.

Adidas’ sharp rise in the United States has been “one of the most phenomenal things we’ve ever seen,” said John Horan of Sporting Goods Intelligence, a US industry analyst, in an interview. “There’s no question that they have very definitely become a very viable alternative for retailers” in the United States, he added. The second quarter strength matched solid growth numbers from the first three months and has driven its share price to record highs, up more than 25 percent since the start of this year.

Adidas, along with German rival Puma, have also been aggressively pushing to sign more star power to sell its shoes and clothes. That effort has taken it further into college basketball. This summer Adidas signed a sponsorship deal worth $160 million over 10 years with Louisville – the fourth largest deal in college sports history. Given that future stars in basketball can be identified at a young age, the competition – both for colleges to secure their services and sponsors to secure their backing – is ruthless.

15 p04 Adidas – Sporting Competition-01

According to a statement from federal prosecutors in New York, Adidas funneled bribes to university coaches and sometimes directly to the players and families themselves, “in exchange for a commitment by the athletes to matriculate at a specific university … and a promise to ultimately sign agreements to be represented by the bribe-payors once the athletes entered the NBA.” In a related scheme that didn’t directly involve Adidas, the coaches were bribed to steer their players toward specific consultants and financial advisors.

It’s unlikely the scandal ends here, according to Mr. Horan. Nike and Adidas “have been at each other’s throats for a long time” in the college basketball market. The indictment, he noted, says that the Adidas officials’ scheme was reacting to counter offers, “so it’s hard to imagine that this thing isn’t going to spread.” Nike, for its part, issued a a brief statement responding to the probe, saying it “strongly opposes any form of manipulation.” A former employee of the company, who left more than three years ago, is also among those indicted.

Acting Manhattan U.S. Attorney Joon H. Kim condemned the practice, alleging the culprits “exploited the hoop dreams of student-athletes around the country, treating them as little more than opportunities to enrich themselves through bribery and fraud schemes.” That’s hardly the kind of marketing Adidas or Nike wants to be associated with in the United States.

Joachim Hofer covers Adidas and other major German companies for Handelsblatt out of Munich. Christopher Cermak is an editor for Handelsblatt Global currently based in Washington DC. To contact the authors: hofer@handelsblatt.com and cermak@handelsblatt.com

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