Sole 2 Sole Ltd
INTRODUCTION
Sole 2 Sole Ltd (S2S) is a UK-based company that is involved in the following operations:
(a) The manufacture of ladies’, gentlemen’s and children’s shoes at three manufacturing plants in the UK.
(b) The ownership of a chain of 60 retail shops in the UK specialising in the sale of shoes, leather goods and accessories.
(c) The running of a distribution centre in the UK for moving shoes and associated products to the company’s own shops and those of competitors.
(d) The operation of a mail order business for shoes and accessories that specialises in promotions with the national media in Europe.
BACKGROUND
The company was formed as Hughes Boots and Shoes in the early part of the twentieth century by Harry Hughes, who was originally from a Yorkshire cattle farming family. At the time, the skins from slaughtered cattle were instrumental in the development of the shoe industry. Seeing the demand for quality shoes, he opened up a small factory that made boots and shoes, most of the raw materials coming from the local industries involved with cattle processing. Items such as nails were also made in nearby factories due to the close proximity of the iron and steel industries. In addition, the company also had access to low-cost labour from the area.
By the mid-thirties, through his determination and very aggressive business attitudes, Harry Hughes had developed a market niche for two types of footwear: top of the range hand-crafted men’s shoes, and boots of very strong construction for use by railway workers, miners and farmhands.
Although this period of time was known as the ‘Depression’ (when many people were out of work), Sole 2 Sole (as the company had become known) was highly successful as the demand for its products was high, due to the likelihood of war and the needs of a small part of upper-class society who were able to afford to pay a relatively high price for a quality-branded product.
Hughes capitalised on the demand from these two sectors and his shrewd business dealings and attitude enabled him to make a considerable fortune during the Second World War from supplying boots to the UK military forces.
In 1946 Hughes saw an opportunity to diversify into high street retailing, as previously all his products had been sold to small independent shoe shops or direct to a buying source, e.g. the Army.
An opportunity came to acquire a chain of 60 independent shoe shops from the Williamson Group as the owner had not had a successful trading period during the war and was heavily in debt. Hughes, though, was aware that Williamson’s owned the freehold of the shops, which were all located in prime sites in sixty major towns and cities in the UK.
In 1960 Hughes changed the name of the shops he purchased from the Williamson Group to ‘Footfall’ and developed the manufacture of a number of in-house brands including Footsoft, Elite and Mode. The shops only sold products manufactured in-house.
By 1965 Hughes had identified yet another market niche: children’s shoes. This opportunity enabled him to set up a separate UK manufacturing plant in another part of the UK, which became highly profitable although, yet again, labour intensive.
In 1968, Harry Hughes decided to retire and handed over the running of the business to his son, Albert Hughes.
Throughout the period from 1970 to the end of the 1990’s the company traded successfully although there were changes occurring in the shoe industry that would eventually impact upon the organisation. These included diversification by the developing supermarkets into shoe-wear, a contraction of the UK shoe manufacturing industry, increased sourcing from other countries, and changes in fashion.
Albert had regarded the business as his personal ‘cash cow’, simply milking the profits and making as little investment as possible in infrastructure, with much of the capital plant being life-expired. Albert’s extravagant lifestyle had become infamous and indicated that he had little interest in the business apart from taking out as much profit as possible. He also ignored the pressure from competitors and the changes in fashion.
In 2004 Albert’s extravagant lifestyle caught up with him and he died on the golf course after a massive heart attack. The business passed in his will to his two sons, Stephen and James Hughes, both in their mid forties and also accustomed to good living and having the finer things in life. However, the business was becoming increasingly stretched to provide the incomes that they required.
The credit crunch of 2008 impacted the business very hard and matters came to a head at the beginning of 2009 when S2S’s bank advised the brothers that the business was about to face a liquidity crisis with financial ratios that indicated that the way the company operated could not continue. Stephen Hughes was anxious to leave the business as he had developed other interests in the Americas and the Caribbean. Without consultation with his brother, he sold his shares (50%) to Rosemary Garner of Garner Ltd, a long-standing competitor of S2S, and left the business almost immediately. This gave Rosemary Garner a 50% interest in S2S.
James Hughes found himself in a very difficult position as Garner Ltd was a very new and entrepreneurial business and committed to new channels of marketing, sales and distribution. Rosemary Garner wanted to attack the shoe market more aggressively and saw no future for some of the manufacturing and the types of shoes made by S2S. More importantly, urgent action was required to get the business back to commercial viability and it was clear that the animosity between James Hughes and Rosemary Garner, the two owning parties, was having a detrimental effect on the business. It became an open secret that Rosemary Garner and James Hughes found it difficult to work together and their equal share holding in the business often resulted in an impasse that frustrated decision making.
In spite of this the business limped on, but after five years of frustration and inactivity they eventually decided that the only resolution would be to find a third business partner who could help break the deadlock and move the business forward.
Subsequently there was an approach from an entrepreneur, Pierre Saint, who was born in France, had lived for some time in the UK, but had graduated from an American business college. He saw potential for the company, but had a vision that was far removed from the way the company was trading. After completing due diligence and examining the financial accounts, Saint made an offer for a controlling interest of 60% of the shares. This offer was at first rejected as James Hughes and Rosemary Garner had wanted to retain a controlling interest. However, it soon became clear that Pierre Saint’s offer was absolutely conditional on obtaining a controlling interest in the business as such the offer was reluctantly accepted by James Hughes and Rosemary Garner. On 1st October 2015 Pierre Saint became the major shareholder (with the financial backing of a venture capital company) of S2S. The ownership also included substantial debts, which had to be repaid. At this time the name of the company remained S2S Ltd and the shops remained branded as ‘Footfall’.
THE SAINT ERA: THE RESEARCH
Saint began a rapid assessment of the state of the business. He already knew the financial figures, which had been identified through the balance sheet, profit and loss accounts and the analysis of the financial ratios. However, other findings were as follows:
MANUFACTURE
All shoes were manufactured from raw materials mainly sourced in the UK. Although the tanning industries had diminished there were still enough skins to support the immediate requirement for leather. Nails were also still sourced from a small factory in the UK. Solvents were sourced from a UK distributor, although the place of manufacture was Indonesia.
The company had three factories, which were all working independently. These were:
THE YORK FACTORY
This was the largest of the three factories and it specialised in top of the range shoes, mainly for men. Only a limited range was made for ladies. The factory employed around 130 staff, of which 100 were involved with the direct manufacture of boots and shoes. Production was on a linear basis, which showed the individual pieces being cut and formed until the end of the line where final glueing and stitching took place. At this point there was an inspection process and, subject to approval, the shoes were then wrapped in tissue paper and boxed ready for distribution. The number of styles of shoe was limited.
Analysis showed that the 100 staff involved in direct production were of an older age profile but were all experienced craftsmen dedicated to the product. Wages were low for skilled craftsmen (just above the minimum legal level) but staff never complained as the factory was located in an area of high unemployment.
Examination showed that there was a high level of wastage of raw materials as a significant amount of leather was rejected on quality grounds.
Despite the intensity of labour in the factory, there was a large amount of capital equipment supporting the processes. The equipment was life-expired and costly to maintain.
Of the remaining staff, fifteen were involved in administration and five were managers or supervisors.
The buildings were in a poor state of repair and were being maintained by a local building contractor, Bryce Ltd. Facilities at the factory included a staff canteen, which was operated by six staff involved in food preparation, cooking, serving and clearing. Produce was bought from local shops on a daily basis, with invoices being sent direct to the company. These invoices were large in number and low in value.
Attached to the factory was a stores warehouse containing racks of raw materials and packaging. Stock value was about £1 million and control of the items was through a manual bin card system. Many of the items had not moved for a number of years. The six stores staff were seen as an extension of production and were included in the 100 people identified as part of the production process.
Finished goods (shoes) were collected and distributed by the company’s own transport fleet on a daily basis.
The company did not use a sophisticated costing system. Selling prices were determined by the merchandisers and the factory was expected to make the shoes for a cost that allowed a mark-up of 100%. This strategy meant that the production staff were put on a short working week when demand was below that anticipated.
THE ILKLEY FACTORY
This factory specialised in industrial footwear. Although still basic shoe manufacture, the processes were somewhat different from ordinary shoes. Some of the material was sourced from overseas but much of the raw material was from the UK.
This factory, like York, was suffering from a lack of investment, and had high maintenance costs. Similarly Bryce Ltd was undertaking maintenance work, receiving £400,000 over the last three years. The major problem in this factory was the roof, which despite continuous attention, still leaked during rain. Joe Bryce’s view was that the roof needed a total replacement, but James Hughes had continuously refused to have the work done.
The factory employed around 180 staff of which 150 were involved in direct production. The remaining staff were in involved in warehousing, administration, supervision, management or support activities.
Unlike York, rejection rates were low as the product would not be checked so thoroughly by the customers who were railway maintenance companies, the military, major building contractors and local government. As long as the product looked satisfactory it was despatched. Surprisingly, returns were very low in number. As at York, distribution of finished goods was by the in-house transport operation, which called at the factory on a daily basis.
The prices obtained for the boots were low as the customer’s buyers were intent on purchasing at the lowest possible price submitted through a complex bidding process. To keep the business it appeared that the boots were being sold at marginal cost.
THE BRIGHTON FACTORY
This factory, located in the south of England, was the most modern of the three plants, and specialised in children’s shoes. Processes were similar to those at York and Ilkley with a high labour element in the manufacture. A significant difference in this market niche was that the range of products was very high, with shoe types including schoolwear, sandals, sports shoes, walking shoes and leisure shoes. The products were successful in the market place as the company marketed the ranges not only in sizes but also in widths. This meant that the production schedules were complex and any change involved not only the use of different raw materials, but different methods of assembly.
The stock of raw materials was high and wastage was also high as products changed with style causing high levels of surplus and obsolete stocks.
This factory had low maintenance costs due to the management approach of the plant manager who bought services on a competitive basis from local contractors using adversarial negotiating techniques. Any re-work was undertaken at the contractor’s expense.
THE DISTRIBUTION CENTRE: COVENTRY
The distribution centre was located in the Midlands. Its lorries collected products from the three main factories and imports of accessories from overseas suppliers. It also acted as the groupage centre for sending out products to the 60 retail shops. A development in the 1990’s saw the function take on distribution of shoes for other retailers and producers. Overall the operation was poor. Stock was put into locations where there was a space and there were difficulties in matching demand with supply. Deliveries were scheduled against an inflexible plan, with the use of twelve lorries delivering to stores on a weekly basis. Often loads were at the legal weight limit so that stock could not be placed on board, or lorries were going out below capacity. The lorries were all roadworthy but life-expired. Maintenance costs were high and the company had difficulty recruiting drivers as they all had to deliver to town centre sites where there were parking restrictions, meaning that much of the travel was undertaken during unsocial hours.
There were frequent instances when trucks bringing products from overseas arrived out of hours, causing friction between the drivers and the gate security staff who would not allow the drivers to unload their vehicles.
The company had experimented with using a number of local transport contractors but due to the variance in volumes and difficult access, deliveries had been erratic, to say the least.
Staffing at Coventry included a depot manager, thirteen drivers, ten stores staff and four administrators. Four maintenance staff were employed to keep the lorries roadworthy. Fuel was bought from any garage the driver was passing by, using an agency credit card.
The location of the depot was in the middle of a town centre, a substantial distance from the nearest motorway and covering 40 acres. Property speculators had made approaches in the past that would have enabled them to acquire the site for residential development. These approaches had always been rejected on the grounds that the amount of money offered had been considered derisory by the Hughes brothers.
MARKETING
All marketing was undertaken from the Head Office located near the York and Ilkley factories. The staff employed included a marketing manager, three merchandisers, four product managers, three sales representatives, one executive dealing with advertising agencies and two support staff. The only direction received from the senior management was that the brands were sacrosanct; names, branding and house style had to reflect the traditions of the company.
The three merchandisers enforced the selling prices on the requirement to achieve 100% mark-up, despite local trading conditions. There was evidence of good statistical market analysis in terms of the success or failure of a style, colour or price. The difficulty for the merchandisers was that they were allowed to be innovative in terms of promotion but their activities were totally geared to supporting the products as designed and produced in the factories.
The marketing manager was also prevented from being innovative as the senior management insisted on making and selling traditional designs and brands. Promotion was restricted to advertising in the traditional areas of the media, which were targeted at AB socio-economic groups. Marketing for the industrial boots was non-existent as this was left entirely to three sales representatives who worked exclusively in this market niche. All sales were made through the demonstration of trade samples and negotiations were conducted with public sector buyers, who were not interested in innovation, only procuring the basic goods to a standard specification at the lowest possible price.
In the instance of children’s shoes, this was left entirely to the four product managers who had control of all design, advertising, promotion and selling and who dealt exclusively with the Brighton factory.
In terms of modifications to existing designs, these came about through the personal involvement of the previous owners who had instigated changes as they saw fit. To date their instincts had been relied upon. In other words, they knew the shoe business and the market niche but had lost sight of other changes in the shoe business.
One area of growth that had been identified was that of sports shoes or trainers. Despite the success of these in the market place, the company had decided it would not enter this market in the high street arena, but would sell them by direct mail through the promotional arm of the business. Two product ranges that had been particularly successful were the ‘Nikki’ which was marketed as being “inspired by athletes” and the ‘Springbok’ aimed at “sports professionals”.
RETAIL OPERATIONS
The sixty retail shops were managed by a retail manager and twelve staff based at Head Office. The role of these staff was purely and simply to sell products profitably. They took the products as provided by the factories and set prices in accordance with company policy. Their key role was in shop layout and shop design. The recruitment of staff was devolved to a shop manager working to tight guidelines in terms of staff profile, salary, conditions and uniform. It was clear that there was animosity between the individuals in the marketing and retail operations, as the latter felt out of control and isolated from what was happening in the business. Despite being aware of changing fashion and trends, the staff had little or no input in terms of local preferences and pricing. Subsequently, each shop had a periodical sale to move unwanted stock. Furthermore, when there was a successful product, demand could not be met as all orders to the factories had to go through the marketing function.
The major benefit to the company was the location of the shops, which were all in prime locations in town and city centres. Despite the worrying trends in retailing, the rapid growth in on-line sales channels and the encroachment of out-of-town supermarkets, this had not drastically affected the shoe trade in this company’s market niche.
As all the properties were owned by the company, the only direct expenses were local taxes, wages (many staff being part-time), utilities (electricity and water) and security. No local advertising took place, customer loyalty being built around tradition, location and branding. Thus the retail operation as a whole appeared to be profitable. However, deeper analysis showed this to be untrue, as some of the shops were not able to cover costs.
Apart from shoes, all the shops sold accessories: leather handbags, umbrellas, key fobs and other leather-based products. In recent years these had been bought-in through wholesalers who were increasingly sourcing from outside the UK.
THE PROMOTIONS DIVISION: SLOUGH
The promotions manager and sixty staff run a specialised division that arrange the direct sales to readers of magazines, and make special arrangements with newspapers for offers. All the products were manufactured in the Pacific Rim and imported into a central warehouse located at Slough in the south of England. Buyers select from the latest ranges presented to them by sales representatives of the agents of overseas shoe manufacturers. They would present the buyers at Slough with samples of new designs. The promotions staff would set a selling price based on current market forces and indicate to the sales representatives that in order to achieve a required mark-up they would only pay a set price for a production run. The terms and conditions of trading reflected the nature of the industry, which was that an order would only be given if four criteria were adhered to:
The price agreed during negotiations would be fixed for the set quantity
Achievement of the delivery date to the warehouse in the UK – any late deliveries would allow cancellation of the order with no contribution to work carried out
Payment would only be made 60 days after receipt of all the finished goods
That any stock line turning out to be unsuccessful gave the company the right to cancel any outstanding orders in manufacture without recompense to the supplier.
This somewhat cavalier attitude to suppliers was based on the fact that there were many suppliers and agents chasing a few buyers.
Analysis showed that this was a highly profitable operation, despite the fact that the quality of the finished product was poor, deliveries were often late, quantities were different from those agreed and customer complaints were high. The success was due to the payment of extremely low prices for imported shoes and a management operation that was slick and ruthless.
The warehouse operation was efficient, in that orders were entered into a computer, which produced address labels, and stock was distributed within seven days using a number of carriers. Returns were not controlled, products being simply thrown into a rubbish skip for scrap and a replacement product being despatched free of charge. The cost of quality control was greater than the cost of an individual product.
The only weakness in this division was in the handling and processing of money. Orders came direct from the public and payment was in the form of cheque or credit card. Often overloaded by demand, the division was slow in banking money, and financial reconciliation was almost impossible. All that mattered was that the order was processed.
The nature of this operation was manic to say the least. If a particular design was successful and sales escalated, the buyers in the division needed to get the sales agent to replenish stocks quickly. Invariably, the overseas manufacturers were making something else, so that getting the division’s products into the UK was a tortuous affair. The staff at Slough were rarely able to identify the actual location of the factories or the names of the company manufacturing the goods in the Pacific Rim. It was suspected that the shoes were being made in factories that probably did not conform to health and safety legislation and employed under-age labour for very poor remuneration. The attitude of the management at Slough was that they did not particularly care about a supplier’s working conditions as long as they got the products they wanted.
HEADQUARTERS AND ADMINISTRATION: COBBLERS MANOR
The headquarters was located in an old mansion house set in a large acreage close to the York and Ilkley factories. Mr Saint was based here; Hughes and Garner having vacated the luxurious premises. With the purchase of the company, Saint had acquired the following HQ staff:
Two servants and two waiters
Two chauffeurs (plus two expensive cars for Hughes and Garner)
Four kitchen staff
Two cleaners
Two gardeners (for grounds maintenance)
Six finance staff (dealing with corporate payroll accounts receivable and accounts payable)
Production manager (in overall charge of the factories) and three support staff
Operations manager (in overall charge of warehousing and distribution) and four support staff
Order clerk (processing orders for goods and services forwarded from the operating areas)
Stable manager and three stable hands (the company owned horses)
Two receptionists
Marketing manager and staff
Retail manager and staff.
Data showed that there was poor credit control in that trade debtors were not being chased; this enabled the private sector buyers in particular to delay payment for at least six months. Creditors seeking payment for overdue accounts were informed that “the cheque-printing machine was broken” or “the cheque is in the post”.
THE POSITION AT THE END OF 2018
Pierre Saint was appalled by some of the findings. He analysed the data, interviewed many staff and by the end of 2018 he had taken the following action:
Sacked the servants and one waiter, one chauffeur, two kitchen staff and one receptionist at headquarters. All were instantly dismissed and paid the minimum statutory redundancy. Records showed that all had been employed for many years with the S2S
Ordered the retail and promotions divisions to raise prices across the board by between 10% and 20%
Instructed the finance staff to withhold the payment of all invoices until further notice
Issued instructions that all building maintenance was to be put on hold
Called in buyers from the users of industrial footwear and told them that with immediate effect all prices would be lifted by 20%. This would be reduced to 10% if the buyer’s organisations settled all outstanding accounts immediately
Also, during this period Pierre Saint had received a letter from a London firm of solicitors claiming that the company was “passing off” their footwear as well-known brands. The solicitor was demanding the immediate withdrawal of several products and seeking payment of a large amount of money in damages.
The information in this case study is purely fictitious and has been
prepared for assessment purposes only.
Any resemblance to any organisation or person is purely coincidental.
QUESTIONS
All questions relate to the case study and should be answered in the context of the information provided. All questions are equally weighted and your answers should be around 800 words per question.
Q1 Prepare a stakeholder analysis of Sole 2 Sole Ltd. and using accepted models and methodologies evaluate their relationship to the business.
Q2 Using accepted models and methodologies, prepare a complete internal analysis of Sole 2 Sole Ltd. Identify their core competencies and discuss how these competencies can be used in relation to three key strengths and three key weaknesses that are likely to impact on the business in the foreseeable future.
Q3 Using accepted models and methodologies and given its current portfolio and the core competencies that you have already identified. How would you assess S2S’s position in the market place and its broad strategic options?
