(Bloomberg) -- A bribery scandal in U.S. college basketball hangs over Adidas AG's efforts to close the profitability gap in North America, where it has been trying to catch up with its larger rival Nike Inc.
Adidas wants to expand sales of its namesake brand in North America to more than 5 billion euros ($5.9 billion) by 2020, 73 percent more than in 2015, requiring an annual growth rate of about 15 percent. That effort suffered a setback when one of its employees was named in the U.S. basketball case, which accuses coaches, financial advisers and others of making illicit payments to cash in on the sport's riches.
“The U.S. for us is an investment area,” Chief Executive Officer Kasper Rorsted said at Adidas's investor day in March. “There is a lot of infrastructure to be built, infrastructure physically, but also emotionally that people actually migrate to our brand.”
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Adidas doesn't break out revenue from basketball, let alone college basketball, but North America overall last year generated just 19 percent of Adidas's revenue and 6.1 percent of its operating profit. Most came instead from China and Western Europe. And in the U.S., Adidas is increasingly known as a fashion-forward brand, thanks to retro-chic shoes like its Stan Smith tennis line and collaborations with stars like Kanye West.
That helps to limit the immediate fallout from the scandal, and the company's share price has stabilized after tumbling 2.4 percent on Tuesday. Adidas said in a statement that it's cooperating with the authorities and has engaged outside counsel to investigate.
Still, the controversy raises the stakes if the brand suffers damage to its reputation in a region where it has the most to gain. The NCAA scandal hasn't been the only stain for Adidas in basketball: In July, it apologized for allowing a coach in its popular AAU youth basketball tournament series to demand the replacement of a female referee.
Management board member Eric Liedtke in March said basketball is a “huge growth opportunity” for Adidas, in part because of its weaker position in the sport compared with Nike. Nike generated 68 percent of pretax profit in the U.S. last year.
Emphasizing the opportunity for Adidas in the U.S., Rorsted said in March that the company was “in a long-term race.”
“We need to make certain that we build a right position in the U.S.,” he said.
To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net.
To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III
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