Does the Adidas Scandal Point to Larger Corruption in College Sports?

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Adidas (NASDAQOTH: ADDYY) has made a decided push to gain sneaker market share in North America against dominant competitor Nike (NYSE: NKE) and upstart sportswear challenger Under Armour. Yet the company finds itself embroiled in a college basketball scandal, with one of its senior executives named in a criminal complaint after allegedly steering money to the family of a highly-prized high school recruit.

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On this episode of Industry Focus: Consumer Goods, the cast discusses the unsavory dealings that often seem to come to light when global sports brands pursue opportunities in college athletics.

A full transcript follows the video.

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This video was recorded on Oct. 10, 2017.

Vincent Shen: Asit, I know that you wanted to talk about Adidas and the controversy surrounding the company recently due to some shady practices in the world of college sports. I've been following this as well. It's a very interesting look into the underbelly of the NCAA and college sports.

Late last month, federal investigators released details on what amounts to be pretty significant corruption in the NCAA, which included the arrest of a global marketing director at Adidas. There have been some resignations, there have been more allegations revealed. Asit, can you give us some details of what happened here?

Asit Sharma: Sure. The complaint that you talked about was unveiled on Sept. 26. The one that we want to talk about related to Adidas alleges that senior executive Jim Gatto participated in a scheme to steer $100,000 to the family of a highly recruited player who is said to have been recruited by Louisville's basketball program. So our listeners who are avid basketball fans know about Louisville -- it's a very storied program, but it's had its little shades with scandal through its head coach Rick Pitino. And one of the consequences of this criminal complaint is Rick Pitino has been pretty much fired from Louisville. I don't know if he was formally fired yet, but he's out.

The other implication is for Adidas, which is a highly respected shoe company trying to make market share gains in North America against the almighty Nike. Adidas now has a little bit of shadow thrown into this, although management is saying that this is a lone wolf, and they are investigating. And you know what, if I was management, I think, of a global company like Adidas, I would have the same line. "We don't know anything about this, but we're investigating." So we'll see how all this shakes out.

But the point that I wanted to make today for listeners is, isn't this story familiar? Don't we seem to hear every few years that there's some money being passed under the table that emanates from these big sporting companies who want colleges to wear their brands so they can sell that gear? And the funny thing is, the NCAA, which has very strict rules, says its athletes are amateurs. They are a money-making machine. So I don't know if it's the big money that's chasing the NCAA that causes this kind of underhanded bad stuff that shouldn't go on. Is it just bad eggs that pop up every once in a while? But man, we just seem to hear this with a regular cadence every few years. What are your thoughts, Vince?

Shen: When it comes down to it, in terms of the bottom line, the opportunity or the potential that some of these star players present, even when they're just high school prospects -- you think about the fact that for 10 years now, the NBA has been unable to draft top talent directly out of high school. But when it comes down to it, the biggest sneaker brands, like Adidas, which is making a push, like Nike, which is the leader in the space, Under Armour, they still keep a very close eye on these youth leagues, these high school star players, and they have very strong incentive to push the best players to the schools that they're partnered with. You mentioned Louisville and how that's the center of this controversy. Well, Adidas paid $160 million for a 10-year deal with the university. It was the company's biggest ever college deal. As a result, the college players at these schools get outfitted with the sponsoring company's sneakers, so when the stars go pro, they already have some of that loyalty to the company.

You mentioned the bribe, it was around $100,000. Some of these other ones they've uncovered and are investigating were cited at $100,000 or $150,000, with implications that competing companies were making counter offers, bidding against each other for the best talent. So maybe this ends up unraveling and roping in other companies besides Adidas. But that $100,000 to $150,000 is a very small investment when you consider how lucrative it can be to sign the next NBA superstar. I'm dating myself a little bit here, but about two years ago, I dedicated an episode of Industry Focus to celebrity athlete endorsements and the return on investment that companies might actually see from these kinds of deals. And when you consider the fact that Jordan is a multi-billion dollar brand for Nike, companies are paying hundreds of millions of dollars to star players to give them their own sneaker lines. Of the biggest footwear deal earners in the past year, the top four, that's Jordan, LeBron, Durant and Kobe, they earned $183 million in the past year. Those are all supported by Nike. Adidas has been pushing its own efforts to lock down its own big deals in the past two years since the new CEO took over the company. When you have those kinds of numbers, and how much potential there is in the right name on a sneaker, and how that can boost demand for the consumers, it becomes obvious to me that a $100,000 bribe to win a player's loyalty early on in their career probably makes for a good investment, even if it's morally unacceptable, or in this case, might result in some of these legal issues. I'm not surprised to hear about this. We see it in the professional levels as well.

The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.