SOCIAL AND ENVIRONMENTAL RISKS
We have a continuing
responsibility to our workers, suppliers and the environment.
Malpractice in these areas, in particular human rights violations
and dubious employment practices, can have a significant
impact on the reputation and operational efficiency of our
Group and our suppliers. To limit this risk, we have established
workplace standards to which suppliers must conform before
and during business relationships with the Group. 
see Sustainability Internal inspections of supplier factories verified
by extensive independent audits are conducted regularly. In the
event of non-compliance with these standards, we develop
joint action plans and set deadlines for compliance and further
improvement. When these deadlines are not met, business
relations are terminated. see Sustainability, and
www.adidas-Group.com/sustainability
We expect to further strengthen our supplier monitoring program in 2008. As a result, we continue to regard the risk of social and environmental malpractice as likely in only isolated cases and we believe the potential financial impact is low.
NATURAL RISKS
The adidas Group is exposed to external risks
such as natural disasters, epidemics, fire and accidents. Further,
physical damage to our own or our suppliers’ premises,
production units, warehouses and stock in transit can lead to
property damage and business interruption. These risks are
mitigated by ample loss prevention measures such as working
with reliable suppliers and logistics providers who guarantee
high safety standards and disaster recovery plans. In addition
to the considerable insurance coverage we have secured, the
Group has also implemented contingency plans to minimize
potential negative effects.
Our overall assessment of this risk is unchanged versus the prior year. As a result, we believe the likelihood of natural risks is low and expect only minor financial loss after insurance compensation should natural risks materialize.
STRATEGIC AND OPERATIONAL RISKS
PORTFOLIO INTEGRATION RISKS
The adidas Group is exposed
to risks related to the integration of newly acquired businesses.
In our ongoing initiatives to integrate the Reebok brand, we
face a risk of overestimating potential revenue and cost synergies
as well as organizational execution risks. Organizational
execution risks relate, for example, to the standardization of
functional business processes across the different brands and
harmonization of the Group’s IT systems. To mitigate these
risks, we implemented a dedicated controlling function in 2006
to continuously oversee our integration activities.
The realization of the projected revenue and cost synergies in
2007, as well as internal transparency on 2008 initiatives, supports
our confidence in achieving our medium-term synergy
targets. see Outlook We therefore believe there continues
to be a low likelihood of portfolio integration risk occurrence.
Due to the magnitude of projected synergies, however, we still
regard the potential financial impact of these risks as high.
RISKS FROM LOSS OF BRAND IMAGE
Maintaining and
enhancing
brand image and reputation through the creation
of strong brand identities is crucial for sustaining and driving
revenue and profit growth. It is also an important credential
as we extend our brands into new categories and regions.
The adidas Group faces considerable risk if we are unable to
uphold high levels of consumer awareness, affiliation and purchase
intent for our brands. To mitigate this risk, we have defined
clear mission statements, values and goals for all our
brands. These form the foundation of our product and brand
communication strategies. We also continually refine our product
offering to meet shifts in consumer demand and to contemporize
our offering to respond to current trends. Central to
all our brand image initiatives is ensuring clear and consistent
messaging to our targeted consumer audience, in particular
at point-of-sale. Strong brand momentum at adidas and
TaylorMade-adidas Golf, as evidenced in improving market
research
results, gives us confidence that brand image risk
in both these segments remains low.
During the past twelve months, we introduced our first post-acquisition
initiatives to support our long-term brand image
strategy for Reebok. In 2008, we will increase our efforts by
launching several new product technologies and a new global
brand campaign to improve
the overall consumer experience
for the Reebok brand. see Reebok Strategy Nevertheless, due
to the current weakness of the brand in North America and the
UK, and the possibility
that our revitalization initiatives fail to
improve brand image in the short term, we view the likelihood
of a further reduction in brand image as medium. This could
potentially have a high financial impact on the sales and profitability
of the Reebok segment.
Aggregating these risks, we continue to believe that brand image risk for the Group has a medium likelihood of occurrence and also a medium potential financial impact on our Group.
OWN-RETAIL RISKS
New adidas, Reebok and Rockport own-retail
stores require considerable up-front investment in furniture
and fittings as well as ongoing maintenance. In addition,
own-retail activities often require longer-term lease or rent
commitments. Own retail also employs significantly more
personnel in relation to net sales than our wholesale business.
The higher portion of fixed costs compared to our wholesale
business implies a larger profitability impact in cases of significant
sales declines. The Group minimizes this risk by only
entering
into lease contracts with a duration of less than ten
years. Store performance is measured by a retail scorecard
consisting of nine quantitative key performance indicators. All
shops are ranked by their weighted average score. Underperforming
stores are restructured or closed as appropriate.
We continue to believe the likelihood of major closures is medium. However, due to the strong growth of own-retail activities and a rapidly consolidating retail environment, we assess the potential financial impact from these closures, which may also involve impairment charges, as medium.
