Franchisees accuse Adidas Korea of abusive practices

An Adidas store in Myeong-dong, central Seoul [NEWS1]

The Korean unit of the global sports brand Adidas has come under fire for allegedly abusing its power, known as gapjil, toward its franchisees, including coercive supply practices and pushing franchisees to continue operating Adidas stores across generations.

The Adidas National Franchisee Union, along with the Korea Franchisee Union and the Democratic Party of Korea, held a press conference at the National Assembly on Sept. 7 to condemn what they called unfair practices by Adidas Korea.

According to the Adidas National Franchisee Union, Adidas Korea revoked the franchisees' rights to sell on an online shopping mall that had been jointly operated by franchisees and Adidas Korea, with the change coming into effect at the end of December 2021. Additionally, in January 2022, Adidas Korea introduced a restructuring plan for its offline stores, notifying approximately 80 out of 100 franchisees that their contracts would not be renewed.

“Many franchisees had expanded or relocated their stores at significant financial strain to comply with Adidas's policy of increasing store numbers,” the union said. “Given the challenges of navigating the pandemic and the additional financial strain of interior renovations, we had to potentially face bankruptcy if the contracts were terminated.”

The allegations also extended to the imposition of the “Second Generation” policy on franchisees, where family members, including children, were compelled to work for Adidas stores.

“The policy of passing down stores to our children has put families at risk, as even children who were pursuing different careers have been drawn into Adidas,” the Adidas National Franchisee Union said.

In an email response to the Korea JoongAng Daily on Monday, Adidas Korea acknowledged that it had selected some franchise operators as “Future Partners” with whom the company will continue business relations after 2025. For franchisees not selected, they were informed that they could continue to operate their current Adidas stores and sell brand products until June 2025. However, Adidas Korea did not provide precise details on how these Future Partners were chosen, though it said it was a "fair process."

Adidas Korea also addressed changes in its online shopping mall operations. They said that they initially used a “Ship from Store” system, where stores near customers' addresses handled packaging and shipping, rather than central logistics centers. However, due to a significant increase in online demand and orders in 2021, they transitioned to a sales channel equipped with their own delivery infrastructure, rendering online delivery impossible, not only for franchise stores but also for directly operated stores.

“The 'Second Generation' is a commissioned education program for those who want it,” Adidas Korea added. “It is not a policy with the intention of guaranteeing permanent business rights or continuing trading relationships.”

Furthermore, franchisees claimed that Adidas Korea engaged in practices such as excessive product supplies, delivering unpopular sizes without orders. The company also imposed penalties of over 200 percent of unpaid product costs even when franchisees faced challenges in making payments due to the Covid-19 pandemic.

Adidas Korea said that some of these claims are related to what they referred to as “Small Profits Quick Returns”-style transactions, or the practice of receiving surplus inventory items at significantly reduced prices for a certain period from the company.

“These transactions had been carried out over an extended period in mutual agreement with franchisees,” it said.

Regarding the imposition of penalties of 200 percent, Adidas Korea said this was in accordance with their terms of use.

The franchisees said that Adidas Korea has so far refused to talk, despite repeated requests for discussions since Adidas's restructuring in January 2022.

Their application for dispute resolution to the province of Gyeonggi was also denied. Consequently, franchisees reported Adidas Korea to the Fair Trade Commission on April 20.

“We plan to request the summoning of Adidas Korea as witnesses during next month's parliamentary audit, if necessary,” Chung Jong-yeol, advisory chairman of the Korea Franchisee Union, told the Korea JoongAng Daily on Friday.

“There is also the possibility of visiting Adidas in Germany about the situation, as the German headquarters is very likely unaware of these developments and might need to be informed,” Chung added.

Adidas Korea transitioned from a corporation to a limited liability company in 2017. Politicians suspect that the change was an attempt to bypass public disclosure obligations.

Limited liability companies have been used as a workaround to avoid compliance with the newest Act on External Audit of Stock Companies, which was introduced in 2019. The law stipulates that companies with capital exceeding 50 billion won ($37.46 million) are required to disclose audit reports, but limited liability companies, while subject to external audits, are not obliged to make such disclosures.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]