Phillips Shoes

Arpita Agrawal

MBA-IT

Indian Institute of Information Technology Allahabad

For Rakesh Sharma ,CEO of Philips Foot-wear, the best thing about being based in Delhi’s Connaught was the half-a -kilometre walk from the that car-park to the office. Not that he enjoyed walking or stroll for fitness. Rather it was for work: an opportunity for Sharma to study the footwear habits of his fellow pedestrians. Sharma would, generally, enter the office on a high note . “ Score 27(or whatever) for Philips today .”

The summer of 2008 changed that. To Sharma’s trained eyes, it seemed as if , with each passing day , he saw more engineer boots , more shoes with side-walk soles ,more chunky shoes , and less of Phillip’s once ubiquitous 6-hole lace ups. It was obvious; the market was passing Phillips by. “Score 7 for Phillips today, Anna (the secretary) schedule a meeting on the coming Friday with heads of Marketing, Finance and operations.”

Friday. Sharma, entered the conference room to find Uday Menon, Vice President (marketing),Pankaj Mishra Director (Finance) and Sunil Bhatnagar ,Vice President (Operations), in the midst of a animated discussion on the possible reason for the summons. Sharma greeted them but held back from mentioning the reason behind the hurriedly-called meeting.

Mr. Sharma told his audience. “I want you all to switch off your cell phones, and pretend we’re back in 1998. He then asked, what was our position in 1998?”

Bhatnagar, was pleased to reminisce: “Then as now we were market –leaders, with a share of 17% . Our franchisee was built around Value –for –money. And the main objective was to cater to economy segment of the market. Our low-value, high-volumes strategy helped us build tremendous brand equity with our primary audience: the growing Indian middle-class. The entire family would visit the store; it was more of an evening outing than shopping trip. The sales people were friendlier and quality and affordability were taken s constants.

Then we did something stupid, didn’t we? Asked Sharma. “We did admitted Mishra . A rapid increase in the number of yuppies in the 1990s made it possible for companies to move from utility marketing, which stressed functionality of products, to lifestyle marketing, where products like footwear could be sold as fashion-accessories. However, a review of our portfolio revealed that although we had range of products for people belonging to various age-groups, we had nothing distinctive to offer the youth. Phillips seemed to have a fuddy-duddy image, crying to be re-worked into a trendy one. The obvious solution to both seemed to be to enter the premium segment of the market .So, we launched several sharply –focused, premium brands. But things didn’t work out quite the way we though they would, did they?” But the real reason for the downslide was Phillips change in focus. Suddenly, volumes no longer mattered value was the new mantra. Barely after 3 months of launch of premium footwear, were we selling a range of fashion accessories that had nothing to do with footwear. A Phillips retail outlet became a mini-departmental store, where footwear jostled for space with ready-to-wear garments, sports goods, leather accessories, like belts and executive bags, and other accessories. As a result, you could pick up a pair of Phillips canvas ked for Rs. 90- or you could pick up a Phillips blazer of Rs. 1,800.”

This proliferation of offerings created dissonance in the mind of the typical middle-class consumers, they felt betrayed and turned way. While the ambience in stores cried economy, the product range was skewed towards premium .Consumers never got around to accepting the basic contradiction. This turned away both the traditional customer s as well as the new ones .Further another blunder was shifting from low-priced footwear to fashion accessories altogether. The premium offerings also created several operational problems. Designed for mass production, manufacturing processes couldn’t handle the small batch sizes the change necessitated. With the premium offerings just contributing 10% of market, these offerings just created inventory problems.

Financial implications, in 1998. Phillips recorded the first ever loss in 43 years long existence in India: Rs. 8Crores then next year was worse as sales fell by nearly 7%.

Then in order to recover they decided to stick only to footwear portfolio. This also slashed the raw material bill by over 45% .To strengthen economy position, they launched about 200 new products in economy segment. They segmented 1,100 retail chains in three segments: premium stores, family stores and bazaar stores and offered a 25% discount throughout 2000 to ensure that people flock to the stores again. Soon the company recovered and the profits rose to 11crore in 2000 and then 25crore in 2001.

Mr. Sharma then said that you must be aware of my research technique (RBWA) Research by walking around. Well over the past few months I have seen more and more people moving towards premium offerings in the shoe market All around us people are paying more for their footwear’s and we are getting nothing out of it...

Bhatnagar said...” I know my son says, shoes that we make are old fashioned. He insists on wearing huge chunky boots”. Further “we cannot ignore the young? Although the premium segment may account for a mere 12% of market, it is growing at the rate of 30% and that is where the margins are.”

Aren’t we forgetting 1998? querried Mishra

No way said Mr. Sharma “I believe market wasn’t ready for us in 1998 .Today it is...the population is getting young and we can’t afford not to be present in the premium segment.”

QUESTIONS

List the causes which resulted in the losses which the company suffered in 1998?

How can the company reduce its cost of production and improve capacity utilization?

What could be the best strategy for Phillips?