Wednesday, May 25, 2005

Allen – Edmonds Shoe Corporation: “We’ll be back on your feet in no time.”

The Allen – Edmonds Shoe Corporation (AE) makes some of the nation’s finest men’s shoes that retail from $235 to $425 a pair. The privately held company has been making fine shoes since 1922 and has withstood its fair share of difficulties. In 1984, a fire destroyed the company’s manufacturing plant. Determined to keep the company afloat, AE’s CEO John Stollenwerk set-up operations in a school house until a new facility was built. The new facility was a God-send to the company, whose operations needed a make-over to keep up with the evolving shoe industry, where US protective tariffs were gradually waning. With the new facilities, the company enjoyed steady growth and profitability up until 2001.

After 2001, the company began to face its biggest challenge. The shoe industry was changing and scale was necessary to serve large department stores, shoe warehouses, and discount retailers and the best way to achieve scale was by outsourcing operations to cheap labor countries. The changing landscape deeply affected many of AE’s competitors. For instance, the Florsheim Shoe Company declared bankruptcy in 2002. Cole Haan was acquired by Nike and Johnston & Murphy was acquired by publicly traded Genesco Shoe Company. The new mantra was to outsource all shoe manufacturing to China. In fact, nearly 98% of the current shoes Americans wear are imported. Except for Allen-Edmonds and rival Alden, who both have stayed the course producing shoes made in America. The differences in labor costs can be as drastic as $1 an hour in China compared to the $15 an hour that Allen-Edmonds pays its employees before benefits. The economics seems to have taken a toll on Alden shoes, who mainly sells to independent shoe sellers. It is becoming increasingly difficult to find these fine independent shoe stores who sell Aldens for many of these independents are making way for the large stores. It seems that Alden too may disappear like so many other fine shoe makers.

Faced with the option to sell to a larger competitor or to start producing shoes in China, AE evaluated its courses of action and ultimately decided to follow a different strategy: to focus on quality and service by producing in the United States. Stollenwerk explains that by producing shoes in the United States, AE can beat competitor’s quality (due to the skilled laborers who have been hand crafting AE shoes for years). Stollenwerk believes that cheap labor leads to cheap shoes. He also believes that the savvy customer will know the difference and begin to purchase AE shoes instead. Hence, Stollenwerk believes his contrarian strategy will not only allow AE to stay afloat, but it will also serve as a growth driver for the company. Also, production in the US allows for shorter shipping distances that allows AE to respond quicker to their customers than its competitors. AE also maintains lower shipping costs this way. To further shorten the gap with cheap foreign labor, AE completely revamped their operations by installing a new manufacturing process that cut down inventory stock levels from 70,000 pairs of shoes to 10,000, with plans to reduce it even further to 5,000 shoes. Now, AE can deliver a large order to a client within 5 – 7 days, down from 4-6 weeks in the past. Stollenwerk believes this too will help better service clients and lead to increased sales.

AE historically was at the mercy of its buyers. Nordstrom alone accounts for 50% of its wholesale business. To stymie this extreme buyer power, AE began installing retail stores in major US cities. Stollenwerk explains that as long as AE doesn’t undercut the department store’s prices, this initiative has been allowed by department stores. Additionally, AE began selling their products on-line through its company website. These moves have allowed the company to grow sales by targeting a different customer segment that doesn’t frequent the busy and time consuming department stores, while increasing AE’s margins. AE also began a shoe re-crafting business, despite the criticisms from industry experts that said AE would shoot themselves in the foot with this move. On the contrary, this new business has been bringing in constant revenues and also allows for cross selling other products such as belts and shoe accessories. The re-crafting segment has successfully raised the switching costs for consumers as well. Now a customer thinks twice about buying another competitor’s $300 luxury shoe, for there is no recourse for the shoe buyer but to eventually throw them away. At AE, the customer can re-craft their shoes to their original form for a nominal charge, adding to the value proposition of an AE pair of shoes.

AE was also able to reduce the size of its work force from 1000 to 600 employees. The company did this without firing employees but rather through natural attrition – further leading to the loyalty of its workers. Stollenwerk believes this loyalty shows up in the quality of the shoes. Hence, the new operations not only lowers working capital and allows for quicker response rates to customers, but it also lowers the amount of total wages paid to produce an even greater quantity of shoes. Hence, the company is achieving some of the necessary scale needed to compete in today’s market place.

So what have been the results of AE’s gamble? So far, its revenues have been growing by 6 -8% every year since, the quality of their shoes have remained superb, and new retail stores are opening across the country. However, the New York Times believes that this “patriotism” will only get AE so far. Will AE’s new strategy be enough to stay competitive with cheap Chinese labor? That is a good question that only time will tell. In a recent chat with a dozen Chicago GSB students, John Stollenwerk exclaimed that you students are our target customers. If it’s any indication of the company’s future success, this target market left the AE headquarters averaging two pairs of Allen-Edmonds shoes each – a hefty sum for debt laden business school students!

Submitted by:
Mike Barfoot
Jason Boles
Brad Davey

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