Problem Diagnosis
Crocs has been performing very well both financially and operationally since it first
started business in 2002. The company expanded exponentially fueled by organic
growth as well as by numerous acquisitions, which included several smaller footwear
brands and the accessories producer better known as Jibbitz (reference-turnaround
mgt). Due to the “ever-increasing” demand for its products, the company also expanded
its production capacity by opening production facilities in China, Mexico, Canada,
Bosnia, and Romania. The expansion of the production facilities necessarily entailed a
similar retail expansion for the company, which started opening new stores almost every
month. As prospects for the company were getting better and better, in 2006 it went
public by selling approximately 9 million shares for $209,7 million dollars in what came to
be seen as the largest IPO (initial public offering) in the history of the footwear industry.
Financials looked perfect, or so management thought. In 2007, the company reached its
peak of $847.3 million in sales with a net profit reaching almost $170 million (Figure_).
This enviable performance continued until the end of 2007, when things for the
company turned in the other direction. During the first quarter of 2008 performance
faltered, sales growth slowed down for the first time in the history of the company and
continued declining for the rest of 2008. The expansion of the production capacity, as
well as the increases in inventory, had a negative effect on the company as the demand
that was projected never materialized. Revenues dropped only slightly to $721.6 million
(figure), but since the company had taken on large amounts of debt and had racked up
considerable expenses to stock the inventory, which eventually it ended up holding in
surplus, net profits plummeted to negative $185.1 million (reference). As a result, the
company had to lay off approximately 2,000 employees, to close down its production
plants in Brazil and Canada, and to significantly reduce the output of its plants in China
and Mexico as it had huge inventory of shoes that it cloud not sell.
All these
development reflected on the stock price of the company which has plummeted by 76
percent in just one year (Figure_), thus reducing the market capitalization to ¼ of what it
used to be at the company’s heyday.
What are the reasons for this unusually poor performance of Crocs which nearly brought
it to the edge of business oblivion?
Certainly the global financial crisis and the
economic slowdown played their role in Crocs development. However, this staggering
performance faltering which brought Crocs on the verge of bankruptcy could not be
attributed to a single factor. Instead, it could be better explained as the interplay among
several other factors that include, but are not limited to, the following:
-
“Fashion Risk” - One could say that this was the moment when the company fell
victim of the so-called “fashion or fad risk”. A “fad risk” basically means that a
company’s sales are too volatile and susceptible to the risk that products may go
out of fashion or lose their appeal. This is especially true if the company relies on a
very narrow set of products and is not well diversified. Once a fad (such as the clog)
arises, it exponentially generates demand for the company, thus creating an
expectation in owners and managers that the “spectacular” demand is going to
continue forever, while in reality it continues for a very limited period of time. This is
exactly what happened to Crocs – demand soared thus prompting the company to
take on more debt in order for its production capacity to keep pace with the market
demand. However, as the clogs lost their popularity among large segments of
society, the company ended up with huge amounts of inventory that it could not sell
and which incurred for the company considerable inventory impairment and
warehouse costs (reference).
-
Overproduction – Another considerable problem that contributed to the poor
financial performance of Crocs is overproduction. Encouraged by its strong initial
sales and by its desire to sell clogs everywhere, even in gasstations, the company
set very ambitious sales targets in anticipation of a very high demand, which
eventually never materialized. This could party be attributed to the company’s
lacking of a functional inventory management system. In other words, unlike other
companies in the industry which used just-in-time inventory management systems,
Crocs had absolutely no idea of how much inventory is out there in the stores, how
much was sold, for how much time, and how much more was needed, if any
(reference).
Counterfeiting – Knockoffs or cheap copies of Crocs’ product virtually flooded the
-
markets of countries which were not especially keen on protection of brand and
trademark rights. This was a major problem for Crocs as it directly infringed over its
market share worldwide (the company was losing potential revenue) and because
on several occasions it drew the company in lengthy and expensive lawsuits which
were not always resolved in the company’s favor. The major reason for this virtual
ubiquity of fake clogs was that their design was simple and very easy to replicate.
Another reason is that most customers were hardly able to differentiate between the
genuine Crostile material and the counterfeit rubber or they were simply not brandloyal and were willing to buy and wear fake clogs.
Product durability – One of the greatest perceived advantage of the classical
-
clogs eventually turned out to be their greatest “defect” as well: They were very
durable and they lasted very long. According to some estimates, conducted both by
Crocs and by external analyzers, the typical clog would last and would be perfectly
suitable to wear for as long as 4-7 years. (reference) Customers of the company
realized that their clogs were holding out, so they found no need to pre-emptively
purchase new ones.
Niche nature of the company – Another problem for Crocs was that from its very
-
beginning, it positioned itself as a niche company targeting a very narrow customer
base. As was mentioned above, through its clog, the company appealed mainly
watersport enthusiasts and a bunch of professionals such as doctors, nurses, chefs,
etc. Understandably enough, this was an obstacle to Crocs’ ambitions to grow and
become a world shoe leader, for, if it was to grow, the company needed to diversify
and attract more customers beyond the above-mentioned segment.
-
Economic Crisis of 2008 – The economic crisis of 2008 and the subsequent
recession led to a strong implosion of consumer-goods demand, especially for
durable goods.
Not surprisingly, as a company exclusively producing and
marketing durable goods (5-7 years useful life), Crocs’ sales were adversely
affected which further contributed to its dire financial performance in FY 2008.
-
High fixed costs – In an attempt to get closer to customers and boost its sales,
Crocs expanded the number of its own stores form 0
when it first began, to approximately 41% in 2014
(Figure _) (reference). However, the anticipated effect of
this retail-store expansion was a significant rise in the
company fixed costs. This reflected negatively directly
on the company’s profit margin and its operating profit.
What further exacerbated the issue was the fact that
Crocs’ sales were highly seasonal (high in the summer
and almost dead in the winter), while its fixed costs were more or less constant.
-
High senior management turnover – High management turnover, as evidenced
by the frequent CEO changes, was another concern for the company. There have
been four CEOs in the ten-year period starting from 2005, with the current one
(Gregg Ribatt) assuming office in January 2015 after Blackstone (the company
that signed a capital-infusion deal with Crocs) insisted that the former CEO –
John McCarvel - be retired as part of the restructuring process of the company.
(Resnikoff, 2010) This unusually high turnover may be an indication of excessive
resistance
against
management.
restructuring
in
the
company
and
a
self-interested
-
Poor Management Information Systems – Because Crocs is a large, complex,
and geographically diverse company, effective management information systems
were essential for its good performance. However, as evidenced by the
company’s lack of an effective inventory management system, Crocs was not
particularly effective in this area either. The company also lacked an Enterprise
Resource Planning System (ERP) which, in huge entities like Crocs, is
particularly useful in bringing all of the important metrics and KPIs into a single
dashboard. As of 2015, however, the company has already realized the need for
such a system and started the process of implementation of an SAP-provided
ERP system (reference).
Resnikoff, Laura. RESTRUCTURING CROCS, New York: Columbia Business Schoole,
2010. Columbia University. Web. 16 Dec. 2015.https://turnaround.org/cmaextras/
CROX---Carl-Marks-Case-Study.pdf>.