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Hong Kong protests deepen retail gloom as China visitors stay away


HONG KONG (Reuters) – Increasing civil unrest in Hong Kong is scaring off Chinese tourists, heaping further pressure on retailers which are already grappling with a protracted slowdown in sales.

Central Hong Kong descended into chaos on Sunday as pro-democracy protesters converged on barricades as hundreds of police cordoned off streets and walkways and tensions flared amid the arrest of several lawmakers. Police used tear gas to disperse demonstrators.

With mainland Chinese travelers likely to avoid Hong Kong over the long National Day holidays this week due to planned protests in the city, the downtrend in retail sales in the former British colony is set to extend beyond its six-month slide.

Already hurt by Beijing’s anti-corruption campaign, which has led Chinese visitors to tighten lavish spending in the city renowned as a shoppers’ paradise, Hong Kong businesses are also facing a slide in the number of tour groups.

Added to which, those who traipse across the border each day are now more interested in basic household products and infant milk formula than luxury handbags and high-end fashion, data shows.

Travel agents said the number of Chinese tours has dropped by up to 30 percent, boding ill for the busy Golden Week holiday that starts on Oct. 1, usually a busy period that retailers rely on for a boost to their sales.

Hong Kong activists are expected to lock down the heart of the financial center on Wednesday, part of a civil disobedience movement that some fear will hurt the city’s competitiveness and business environment. At the heart of their demands is the right for Hong Kong people to choose the city’s next leader, rather than a leader pre-selected by Beijing.

Demonstrators are demanding democracy in a series of protests that will culminate in an “Occupy Central” blockade of the financial district on Oct. 1, the start of China’s long holiday.

“For overseas tourists, they don’t understand much about Occupy Central, but they are concerned if there will be any riots or large-scale rally, and they worry about the refund policy if there is unrest,” said Paul Leung, chairman of The Hong Kong Inbound Travel Association, referring to refunds on tours.

It was not surprising to see a 20-30 percent drop in the number of Chinese tours, he said, adding that the size of the groups had also dropped to 20 to 30 people from about 40 in the past.

China’s slowing economic growth has been a negative factor for luxury goods makers and Hong Kong retail-related stocks have been sold off lately on weak consumer sentiment and uncertainties due to the civil unrest.

Prada SpA’s (1913.HK) Hong Kong-listed shares have fallen to their lowest level in 26 months.

“We are concerned about the development,” said a spokeswoman from cosmetics chain Sa Sa International (0178.HK). “Sa Sa is closely monitoring the event and will adopt contingency measures when appropriate.”

MORE WELCOMING PLACES TO GO

“Social, political tension is clearly driving a few people away because obviously you have a lot of different options. If you’re a wealthy Chinese individual, the likelihood is that you’ve been to Hong Kong two or three times already and you’ll have more welcoming places to go to,” said Erwan Rambourg, who researches luxury and sporting goods research at HSBC.

South Korea and Japan were among the top options, he said.

Hong Kong’s retail sector relies heavily on mainland Chinese visitors, who contributed around one-third of the city’s retail sales in 2013, according to Credit Suisse.

Prospects are not looking up yet, as demand for luxury goods continues to slide while spending by locals remains sluggish.

The Retail Management Association has revised the city’s 2014 retail sales growth to 5 percent from 12 percent, while Hang Seng Bank trimmed its forecast to 5 percent from 13 percent. Retail sale in terms of value rose 11 percent in 2013.

Hong Kong retail sales for August are due on Sept. 29.

But some retailers in the Central business district and shoppers are not too worried about the impact of protests.

“If our shops in Central are affected, we will consider shortening operation hours as a measure to ensure the safety of our staff and customers and to avoid losses to the shops,” a company spokeswoman from Chow Tai Fook Jewellery (1929.HK) said.

“We, however, believe there will not be much negative impact on our business as customers can go to our shops in other locations.”

A Chinese visitor in her late 20s, surnamed Zhang, who was shopping downtown where students had boycotted classes to protest, said she would be shopping as usual.

“There are a lot of shopping malls in Hong Kong; we can just go elsewhere.”

(Additional reporting by Kinling Lo and Twinnie Siu; Editing by Anne Marie Roantree and Jacqueline Wong)

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Consumerism booms as Cambodia embraces once-forbidden capitalism


PHNOM PENH (Reuters) – Chy Sila has come a long way since he invested his $500 life savings in a small shop in Cambodia’s capital to sell bootleg music and pirated movies.

Fast-forward 16 years and Cambodians are now watching the films he distributes not on scratchy DVDs but in a $5 million multiplex theater, a joint venture with Thailand’s Major Cineplex (MAJOR.BK) and the centerpiece of a new mall owned by Japanese retail giant Aeon (8267.T) that drew 2 million visitors in its opening month.

The 39-year-old former tour guide, university dropout and son of a mechanic is one of the biggest success stories in a country that was for years Southeast Asia’s war-torn, aid-dependant basket case.

Though poverty is still rife in the countryside, an urban boom and robust growth fueled by garment manufacturing for brands such as Nike (NKE.N) and GAP (GPS.N) has given rise to a growing consumer class that earns triple the average income.

“We see there’s a lot more buying power than before,” said Chy Sila as he took a bite from a croissant and sipped cappuccino at one of the bakeries run by his CBM Corporation, Cambodia’s biggest food and beverage firm.

“People can afford to pay so now’s the time, we’re ready for big brands to come here… Materialism is in peoples’ hearts, what you wear, what you drive, represents what you are.”

With a fast-growing working population and falling dependency ratio, Cambodia has the demographics most favorable to rapid economic growth.

Young Cambodians now buy smartphones, flat-screen TVs and Japanese motorcycles. They tap banks for loans and credit cards and are fuelling the kind of capitalist culture the 1970s ultra-Maoist Khmer Rouge killed 2 million people to prevent.

Aeon plans more malls in Cambodian cities and operates a microfinance firm so shoppers can buy on payment plans. Its new mall, boasting shops from the likes of Mango, Levi’s and Versace, drew 100,000 visitors daily when it opened in June.

“The middle class is growing,” said Aeon spokesman Satoshi Otsuka. “The average age for Cambodians is early 20s and they’re fashion-conscious.”

FAST-GROWING CITY

Chy Sila was born the same year the Khmer Rouge swept to power and says he lost “countless” relatives to Pol Pot’s genocidal pursuit for a peasant utopia.

Today’s capitalist Cambodia, with an economy that averaged 8.1 percent growth from 2000-2012 and expanded 7.4 percent last year, according to the World Bank, is a far cry from what the Khmer Rouge envisioned when it abolished money and property ownership, executed entrepreneurs and blew up the central bank.

Forty years after the population of Phnom Penh were emptied into labor camps, the city is swelling, with malls, office towers, hotels and fast-food chains popping up rapidly.

Modern SUVs, and even the occasional Lamborghini or Porsche, cruise its once potholed streets.

The World Bank says the country of 15 million people is a top global performer in tackling poverty, having cut the ratio of poor from 53 percent of its population in 2004 to 20 percent in 2011.

Foreign direct investment has grown, from $2.65 billion recorded in 2007 to as high as $10.8 billion in subsequent years, according to Cambodia’s investment board.

There’s now a small stock market and the number of banks has nearly doubled since a decade ago, with 35 commercial lenders providing $9.5 billion in loans since records started. Cambodia’s Credit Bureau expects that to surpass $14 billion by 2020 and credit demand to almost double to 3.3 million people.

The average bank loan in 2004 was $3,895, about a fifth of last year’s average of $19,096, according to Acleda Bank, Cambodia’s biggest lender.

“Loans are good for young people like me,” said Hour Veasna, 20, as he signed up for financing from Aeon to buy a $600 camera, equivalent to five months salary. “We don’t have enough money to purchase things that we want.”

WEALTH GAP

In the first half of 2014, bank deposits grew 13 percent and loans to the private sector were up 28 percent, central bank Governor Chea Chanto said in a recent speech. Three million Cambodians use banks to deposit money, up 18 percent from last year, with about 600,000 users of credit or debit cards.

But there are still plenty of Cambodians who don’t have such privileges and Chy Sila says he’s saddened by the yawning gap between rich and poor. He raises money to send children to school and has cultivated an image as a humble entrepreneur, driving a Ford SUV rather than luxury cars such as Rolls-Royce, which entered the local market in June.

The new-found opulence of Phnom Penh can leave a sour taste in the mouths of those who struggle to get basic services in Cambodia, where hospitals are overwhelmed and average annual income is $950 – or $2.60 a day – nearly half that of Vietnam and a fifth of Thailand.

“Economic growth is only for the city,” said rice farmer Heang Samnang, waiting with her sick daughter at the city’s foreign-funded Kantha Bopha Hospital, which provides free treatment to millions of poor. “In rural areas, there’s no development, we just work on farms.”

(Additional reporting by Ritsuko Shimizuin Tokyo; Editing by Martin Petty and Alex Richardson)

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Brussels to accuse Apple over illegal Irish tax deals: FT


(Reuters) – The European Commission will accuse Apple Inc (AAPL.O) of benefiting from illicit state aid in Ireland, based on preliminary findings of an investigation into tax deals, the Financial Times reported citing people familiar with the matter.

Details of the probe, which may come out later this week, could leave the Cupertino-based company with billions of euros in fines, the FT reported.

The Irish government, in a statement in June, said it was confident that it has not breached state aid rules and will defend its position vigorously.

Apple could not be reached for comment outside regular business hours.

Preliminary investigations by the European Commission into Apple’s tax deals in Ireland claim the company benefited from illicit state aid after striking illegal deals with Irish authorities, the FT reported, citing people involved in the case.

The European Commission, the European Union’s competition authority, is also investigating corporate tax deals in the Netherlands, Luxembourg, as well as Ireland, following revelations about the tax-planning practices of major corporations such as Apple, Google (GOOGL.O) and Starbucks (SBUX.O).

A U.S. Senate committee investigation revealed last year that Apple had cut billions from its tax bill by declaring companies registered in the Irish city of Cork as not tax resident in any country.

Ireland, the Netherlands and Luxembourg all have specially structured corporate tax arrangements, but so do other EU member states. In the majority of member states, the effective corporate tax rate is nearly always lower than the nominal rate, which is usually the result of “sweeteners” in the tax code.

(Reporting by Ankush Sharma in Bangalore)

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New CEO could send JetBlue shares flying: Barron’s


NEW YORK (Reuters) – JetBlue (JBLU.O) shares have struggled compared with their airline peers this year, but the arrival of a new chief executive could lead to sharp gains at the low-cost airline, Barron’s wrote in its Sept. 29 edition.

Earlier this month, JetBlue announced that Robin Hayes, its president, would be taking over as chief executive, effective in February. Analysts expect Hayes to focus more on profitability, and “new prices and changes to some amenities could pay off handsomely for shareholders,” the financial publication wrote.

Barron’s speculated that JetBlue shares could rise to $15 if it initiates bag fees and other means of generating revenue, citing Helane Becker, an analyst at Cowen. That target represents upside of about 42 percent from JetBlue’s Friday closing price of $10.58.

JetBlue could increase the number of seats in some of its planes by 8 percent if it shrinks leg room, “bringing in an additional 18 cents in [earnings per share],” Barron’s wrote, citing Becker’s analysis.

The stock is up 24 percent thus far in 2014, sharply outperforming the SP 500’s .SPX 7.3 percent advance, though it has lagged other airline names. Delta (DAL.N) is up 33 percent this year, while American Airlines Group (AAL.O) is up 42 percent and Southwest Airlines (LUV.N) has soared nearly 80 percent.

(Reporting by Ryan Vlastelica; Editing by Nick Zieminski)

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Fed hawk Fisher says U.S. risks falling behind curve on inflation


WASHINGTON (Reuters) – Richard Fisher, president of the Dallas Federal Reserve Bank, said the United States risks falling behind the curve on inflation as wage pressure starts to bubble in some parts of the country.

“I think we could suddenly get a patch of high growth, see some wage price inflation,” Fisher said on the Fox news program Sunday Morning Futures with Maria Bartiromo. “I’m not worried about it yet, but I’ve seen it in my own federal reserve district and I think it could happen to the nation as a whole.”

Fisher said the U.S. economy was “definitely pulling ahead of the rest of the world” and that “our wounds have been healing”.

Some areas, such as Texas, have seen explosive growth, he said. The state benefits from a diversified economy and a pro-business government that has lead to job growth and “massive immigration”.

“We were creating jobs in the second quarter at a rate of 5.8 percent, way ahead of the nation,” he said. “If the federal government would only get their act together and be more like us we would be growing as a nation much, much faster.”

That growth was being accompanied by wage pressure, he said.

“We’re seeing wage price pressures in our surveys that are the highest since before the recession in my federal reserve district,” he said.

The Federal Reserve has said it plans in October to end its third round of “quantitative easing” — a tool used to stimulate the economy. The question, Fisher said, was “how quickly we move to normalize interest rates”.

Fisher has previously said he expected interest rate hikes to come “sooner rather than later” and on Sunday he said he was worried that “we are behind the curve at the Fed”.

“Monetary policy works with a big lag,” he said. “I don’t want to fall behind the curve here.”

He also warned people to be prepared for when rates do rise.

“We’ve been fueling the markets, and at some point trees do not just grow to the sky,” he said.

Fisher is a voting member of the Fed’s policy-setting body in 2014 and is seen as one of its most hawkish members. Other Fed officials worry that tightening policy too soon could derail the U.S. recovery and risk deflation.

William Dudley, head of the powerful New York Fed, said recently that “we need the economy to run a little hot for at least some period of time to push inflation back up to our objective”.

Inflation unexpectedly cooled in August and is falling short of the Fed’s 2 percent target.

(Reporting by Toni Clarke in Washington; Editing by Crispian Balmer)

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Air France strike ends, company to develop low-cost unit


PARIS (Reuters) – Air France pilots called off on Sunday a two-week strike that had cost the airline more than 280 million euros ($355 million), despite continued deadlock with managers over the development of the firm’s low-cost operations.

The pilots launched their strike in an effort to force Air France’s Franco-Dutch parent Air France-KLM to revise plans to expand its low-cost brand, Transavia, fearing that the project would erode their own pay and conditions.

However, they came under increasing pressure to return to work, with France’s Socialist prime minister, Manuel Valls, denouncing on Friday the pilots’ “egotism”.

“It is our duty as union representatives to know when to end a strike, when we know there will not be any progress,” the main Air France pilot union SNPL said.

“We are asking pilots to resume flying, knowing that tensions are inevitable, to allow for the climate to calm down.”

After the strike was called off, Air France said it planned to speed up the development of Transavia, which it believes is vital for the well-being of the company at a time when myriad low-cost airlines are taking root across Europe.

“This ending of the conflict reinforces the company’s determination to makes its economic model evolve in order to cement its leadership,” Air France said in a statement.

It added that the project would create 1,000 jobs in France, including 250 pilot jobs.

The walkout has grounded up to 60 percent of flights in recent days and Air France said services already canceled on Sunday and Monday because of the strike would remain closed, with a progressive return to normal only expected from Tuesday.

Facing growing price pressure, Air France announced this month that it planned to beef up Transavia, more than doubling passenger numbers to 20 million by 2017 and developing a significant part of the business outside France.

The French pilots had tried to convince the company to offer the same contracts to those flying for Transavia as it gives its own pilots, regardless of where they were based. The airline said this was incompatible with the low-cost model.

The dispute highlighted discrepancies in wages, labor conditions and welfare coverage between European countries which are theoretically part of a single market for goods and services, but in fact compete with each other for jobs.

Air France said it regretted that in spite of lengthy negotiations with the unions, including 15 hours of talks on Saturday, an agreement had not been reached.

Valls called on all involved to “reconquer trust” and resume the airline’s development “notably through its subsidiary Transavia France which represents an obvious asset in the high-growth market of low-cost” airline travel.

The government is a 16 percent shareholder in the group and sits on the board.

($1 = 0.7885 euro)

(Reporting by Astrid Wendlandt and Sophie Louet; Editing by William Hardy and Crispian Balmer)

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Yahoo-AOL merger proposal: recipe for revival, or stagnation?


(Reuters) – A proposed merger of Internet pioneers AOL Inc and Yahoo Inc could create a nimbler player in Web video, but strong growth, the measure of success in Silicon Valley, would remain elusive.

Investors are revisiting one of the most speculated Internet combinations, after activist investor Starboard on Friday pressured Yahoo to merge with AOL.

A pairing could help the companies compete in their core advertising business. But even combined, they would remain but a shadow of the Internet powerhouses they once were, analysts and advertising experts said.

Cost cutting after a merger would generate plenty of savings, some $1 billion, according to Starboard’s analysis. Accelerating business growth would be harder.

“Neither company is a leader in ad dollars, and other than cost savings, there is little to gain by combining them,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.

DOING THE MANAGEMENT SHUFFLE

A merger would suck up a lot of management time as the companies integrate staff and systems. In the meantime, the combined company could fall even further behind the competition, said Gordon.

“You’ve saved costs and you’ve become a more efficient slow-growth company,” he said.

In mobile, a high-growth area in which Yahoo and AOL have both been playing catch-up, joining forces would create little apparent benefit, analysts said.

Yahoo and AOL have a meek and decreasing share of the digital ad market, according to data from research firm eMarketer. Google Inc is expected to command more than a third of the world’s $140 billion digital advertising spending this year, with No. 2 Facebook Inc grabbing about 8 percent. AOL’s share is less than 1 percent and Yahoo’s is 2.5 percent, both down from 2013.

SOME BENEFITS

Still, analysts and advertising experts think a tie-up would help when it comes to video programming and newer, automated ways of buying advertising.

Last year AOL made its biggest acquisition under CEO Tim Armstrong when it bought an electronic video advertising platform Adap.tv for $405 million. That technology could fit well with Yahoo’s recent efforts to deliver more online video programming, such as videos about technology and fashion, along with old episodes of the Saturday Night Live television program.

Both companies could benefit from combined content and audience, said Amy Dickerson, vice president, director of digital at Spark, a media agency owned by Publicis.

Pairing up would make Yahoo and AOL a strong No. 3 player in the display advertising market, behind Google and Facebook, said Pivotal Research Group analyst Brian Wieser.

SIZE MATTERS

“The reason why Facebook’s size and Google’s size matters and helps them so much is that they are a one-stop shop for so many advertisers,” said Wieser.

AOL’s heavy investment in programmatic advertising that allows marketers to automate the buying and selling of ads is another asset that would help Yahoo.

AOL has been reaping the benefits. Last quarter, advertising revenue, almost 75 percent of AOL overall revenue, jumped 20 percent in large part to its programmatic efforts and Adap.tv acquisition.

Additionally, AOL ad pricing, meaning what it gets for each ad, is growing while Yahoo’s is shrinking, noted JMP Securities analyst Ronald Josey.

“AOL is specifically doing better in their core business and Yahoo has room for improvement for sure,” he said.

Combining two online services is not a sure bet. Yahoo and Microsoft Corp voiced similar logic when they struck a Web search deal in 2009.

With Microsoft technology powering searches and search advertising for both companies, the partners hoped to mount a more competitive challenge to Google, the world’s No. 1 search engine.

But the boost in search advertising prices has failed to materialize so far, and Yahoo has tried to slow the roll out of Microsoft technology on its websites in certain countries.

(Reporting by Jennifer Saba in New York and Alexei Oreskovic in San Francisco; Editing by David Gregorio)

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Microsoft boss Nadella promises cooperation in Chinese antitrust probe


BEIJING (Reuters) – Microsoft Corp chief executive Satya Nadella promised to cooperate fully with Chinese authorities in their antitrust investigation into his company during a meeting with a top regulator in Beijing, the Chinese government said.

Microsoft has been ensnared in an anti-monopoly investigation launched this summer by China’s State Administration for Industry and Commerce (SAIC), which has already seized evidence from multiple Microsoft offices across China and summoned high-level executives for questioning.

Nadella, who took the helm of the world’s largest software company in February, met with SAIC chief Zhang Mao on Friday in what was portrayed as a conciliatory encounter by the SAIC, one of three antitrust agencies in China.

Microsoft will turn over information requested by investigators in a timely fashion, while the company is confident the government probe will be fair and transparent, Nadella told Zhang, according to an account published on the SAIC website.

Nadella also said the Chinese government’s regulatory practices helped create beneficial conditions for the growth of Chinese and foreign companies, the SAIC said.

Zhang pledged a fair and transparent investigation and said his agency welcomed Microsoft’s questions and suggestions about the investigation, according to the SAIC.

Microsoft declined to comment on the government meeting but said in a statement that it is “serious about complying with China’s laws and committed to addressing SAIC’s questions and concerns.”

Nadella, whose planned visit was first reported by Reuters last month, swung through the Chinese capital as part of his first trip to Asia as CEO.

Nadella also spoke to students at Tsinghua University in Beijing, where he said extolled China as a source of human capital and a vibrant innovation culture, according to the official China Daily.

Nadella is the latest foreign tech executive to arrive in Beijing to diffuse tensions with regulatory authorities, whose muscular enforcement of a 2008 anti-monopoly law has unsettled Western companies.

Qualcomm Inc, which is facing a potentially record-breaking fine, sent president Derek Aberle to Beijing in August to meet with the National Development and Reform Commission (NDRC), the antitrust agency probing the San Diego-based chipmaker.

(Reporting By Matthew Miller and Gerry Shih, editing by William Hardy)

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Adidas fights to draw top talent to HQ in sleepy Bavarian town


HERZOGENAURACH Germany (Reuters) – Adidas (ADSGn.DE) needs world-class designers, brand experts and technical whizzkids to improve its image against U.S. rival Nike (NKE.N), but persuading them to move to its headquarters in rural Germany is difficult.

Adidas has been losing market share to the world’s biggest sportswear brand Nike, which is seen as far cooler in consumer surveys and is based near the hip U.S. city of Portland, Oregon.

Adidas acknowledges it is hard to recruit at its headquarters near the Bavarian town of Herzogenaurach, particularly for design, marketing and digital roles, and admits it missed trends in the U.S. market, where Under Armour (UA.N) has just overtaken it as No. 2 behind Nike. Nike’s better than expected earnings on Sept. 25 underscored its ascendancy.

Adidas is responding by locating some key design roles in the United States at the same time as investing heavily in new facilities at its home base near the historic Bavarian town where Adidas was founded by shoe maker Adi Dassler in 1949.

“We need a lot of that top talent that is cutting edge. Ideally, they are working in the tech industry, in marketing organizations or are coming from top competitors. We need an environment that appeals to them,” said Steve Fogarty, who is responsible for employer branding and digital recruiting

“Designers tend to gravitate to very large, international cities like Berlin, Amsterdam, London and it is a bit harder to convince them to move to the center of Germany.”

Eric Liedtke, the American who took over as Adidas head of global brands in March, has promoted Paul Gaudio to the role of global creative director and moved him from Herzo to the firm’s U.S. base in Portland in a bid to turn around its fortunes in the world’s biggest market for sporting goods. Close to 1,000 Adidas staff are based in Portland, compared with Nike’s 8,500-strong workforce in the area.

Gaudio announced on Wednesday that Adidas will open a small creative studio in New York’s Brooklyn district in 2015 to be led by three young footwear designers he has poached from Nike with a mission to explore design direction for the brand.

That will complement existing creative centers in Shanghai, Tokyo and Rio, but the vast majority of the company’s hundreds of designers for football, outdoor, Originals fashion, training and running products remain based in Herzo.

Adidas shares are down more than a third this year, most recently suffering from a third profit warning in a year in July that the firm blamed in part on a disappointing performance in North America, particularly from its golf business.

Adidas trades at 17 times expected earnings, at a discount to Nike’s 22.5 times and fast-growing Under Armour’s 58 times.

Despite the new designers in the United States, long-serving Adidas Chief Executive Herbert Hainer, himself a native of Bavaria, remains committed to the company’s base in a region proud of its strong economy and companies including BMW, Siemens, Audi, Munich Re and Allianz.

About 3,900 of the total Adidas staff of 52,500 work in and around Herzo, about a third of them from outside Germany, and Hainer said last month the company planned to add 100-150 new staff at its headquarters every year.

GLOBAL FOOTWEAR HUB

While Bavaria has a reputation for beer festivals, lederhosen and conservative politics, Nike’s home town of Portland is a city of 600,000 that prides itself on its liberal values and environmental awareness, as well as a proliferation of trendy eateries and microbreweries.

Based on a campus in Beaverton, seven miles (11 km) outside Portland, Nike’s location in the American northwest also raised questions in its early days in the 1960s, with founder and Oregon native Phil Knight saying everybody originally thought it should be located in New England or the South.

But Portland has since become a magnet for the global footwear industry, helped by the relatively short hop to Asian production hubs and a youthful talent pool, prompting Adidas to move its North America headquarters there from New Jersey in 1993, and drawing U.S. brands like Columbia Sportwear and Keen.

Herzo, by contrast, is a town of just 24,000 people set in rolling fields, though many Adidas staff commute from the nearby university town of Erlangen or the city of Nuremberg, known for its walled old town, gingerbread and sausages but not for the most vibrant nightlife or fashion scene.

Nuremberg has an airport with direct flights to many cities in Europe but not further afield and there is no train link to Herzo from Nuremberg or Erlangen, meaning most staff have to commute by car.

Herzo’s biggest employer is family-owned Schaeffler, which has 9,000 staff in the town, mostly in technical roles producing precision products for the auto and aerospace industry. It is also home to rival sportswear firm Puma (PUMG.DE).

Conscious that it was not the best location for a big global consumer brand, Adidas considered leaving Herzo in the 1990s when the company was trying to rebuild its fortunes after flirting with bankruptcy following the death of founder Dassler in 1978 and then his son Horst in 1987.

But when the departure of U.S. troops from Germany at the end of the Cold War freed up the military base outside Herzo, local authorities persuaded Adidas to stay. It moved its headquarters to the base in 1998 from an overcrowded office in downtown Herzo and has been expanding the campus ever since.

SAFE BUT DULL

Herzogenaurach mayor German Hacker said surveys showed that foreign inhabitants particularly value the high quality of life and security that the town offers.

“Herzogenaurach is a sheltered and manageable town. That is its charm, but you can get to big towns in 10-15 minutes if you want,” he said.

One former employee, who declined to be named because they still work on a contract basis for Adidas, said they left the company because they found living in Bavaria too boring. “It is so odd that this company is in the middle of farmland. It doesn’t have anything to do with style,” the person said.

Adidas recruiting expert Fogarty, who spent three years working in Herzo but moved back to Portland last year, says the vast majority of staff describe working in Germany as an amazing experience once they arrive.

He set up a website to extol the virtues of Herzo, featuring employees from around the world praising the rural running tracks near the office, local beer festivals and the proximity to Alpine ski slopes. (herzo.adidas-group.com/)

Fogarty, who often has to get up at the crack of dawn in Portland to speak to colleagues nine hours ahead in Herzo, said Adidas does not lose staff due to the location of its base as it is flexible about where people work.

    “While our headquarters is technically in Herzo, the opportunity to work in many locations is already here, so why invest in moving the headquarters?” he said.

However, the experience of Puma, founded by Adi Dassler’s brother Rudolf after the two split a joint business, shows the pitfalls of dispersing key staff.

Puma had based its product management and design team for its lifestyle range in London to be closer to fashion trends, but decided last year to move the division to Herzo as it sought to centralize functions as part of a restructuring program.

Puma is in the process of trying to reaffirm its sporting roots after sales tumbled in recent years. Puma had lost its reputation for sports performance gear by moving too far into the fashion business.

Despite investing in fashion brands like NEO and Originals, Adidas has so far stayed true to its sporting heritage.

Adidas recently announced plans to build two new buildings – with a capacity for 3,600 staff – at its “World of Sports” campus outside Herzo and is about to open a 16-metre-high climbing wall in the grounds.

The Adidas campus already features sports fields and stylish buildings including a futuristic low-rise “brand center” clad in black glass that opened in 2006 and a marketing and operations office called “Laces” that opened in 2011 and features criss-crossing walkways above a light-filled atrium.

“You can work in a dull office in the middle of Munich or an awesome office two hours north of Munich,” said Christian Dzieia, Adidas director of property development.

An on-site fitness center with daily yoga and aerobics classes opened last year as well as a bilingual kindergarten for 110 children and a campus canteen revamped with input from German celebrity chef Holger Stromberg.

“We’re hiring a lot of people with a huge passion for sport whose eyes light up when they walk around the campus,” said Fogarty.

“You have the best of both worlds, where you can walk onto this international campus with a lot of high-tech facilities and then go have lunch in a thousand-year-old Bavarian village.”

(editing by Anna Willard and Janet McBride)

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