Adidas has initiated an intensive investigation into allegations of compliance violations within its Chinese operations, a key market for the global sportswear giant. This move follows reports that senior executives in Greater China have been implicated in a scheme involving the embezzlement of millions of euros and acceptance of substantial kickbacks from external agencies.

The allegations surfaced after an anonymous letter, purportedly from employees of Adidas China, was sent to the company's headquarters in Germany and later widely circulated on Chinese social media. The letter detailed accusations against a senior executive managing Adidas' marketing budget, alleging that the executive embezzled funds and received significant kickbacks from external advertising and celebrity agencies. Several other employees and team members were also implicated in the scheme.

Claudia Lange, head of media relations at Adidas, confirmed to CNN that the company received the anonymous letter on June 7. "Adidas is currently intensively investigating this matter together with external legal counsel," Lange stated, declining to provide further comments until the inquiry is concluded.

The letter, as reported by Chinese state media Jiemian, accused the senior executive of not only financial misconduct but also "nepotism" and "workplace bullying," including isolating certain employees and coercing them to leave. Those who complied with her directives were reportedly promoted. The whistleblowers also alleged that one of the executive's subordinates had received millions in bribes, as well as physical items such as real estate.

The ramifications of these allegations are significant for Adidas, whose shares fell by 3.7% on Monday following the news. Greater China, encompassing mainland China, Hong Kong, and Taiwan, accounts for 15% of Adidas' global sales, making it a crucial market for the company. In mainland China, Adidas is the second largest international sportswear brand, trailing only Nike.

Despite a rebound in sales growth in China after Beijing lifted Covid restrictions at the end of 2022, Adidas has faced a decline in market share due to fierce competition from local brands and backlash over its stance on using Xinjiang cotton. In 2021, Adidas, along with other Western apparel brands like H&M and Nike, faced a boycott in China after raising concerns about alleged forced labor practices in Xinjiang.

Adidas has historically leveraged celebrity endorsements to bolster its brand in China, partnering with popular actors and singers as brand ambassadors. However, the current investigation casts a shadow over its marketing strategies and overall operations in the region.

The company's new CEO, Bjørn Gulden, who previously led Puma, has been steering Adidas towards a turnaround, particularly in the Chinese market. Under his leadership, Adidas saw an 8% growth in sales in China last year, with a notable 37% increase in the last quarter of 2023. Gulden attributed this success to the company's ability to resume marketing activities "in an almost normal way," positively resonating with Chinese consumers.

Despite this progress, the allegations of embezzlement and kickbacks pose a significant challenge. The company's marketing budget for Greater China is substantial, amounting to 250 million euros ($268 million) annually. CFO Harm Ohlmeyer has assured investors of improved profitability in China for 2024, emphasizing the importance of this market to Adidas' global strategy.

Adidas has pledged to take the allegations seriously, emphasizing its commitment to legal and ethical standards in all markets. The ongoing investigation, conducted with external legal counsel, aims to uncover the extent of the compliance violations and hold accountable those involved.