If you were the marketing manager of Monte Calcados, what strategic decisions would you propose? 1. Should MC start distributin

Copyright

Exhibit 1

________________________________________________________________________________________________________________________________ HBS Professor Emeritus James L. Heskett and College of Charleston Professor James T. Kindley prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional reference to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

9 – 9 1 8 – 5 1 3 F E B R U A R Y 1 2 , 2 0 1 8

J A M E S L . H E S K E T T

J A M E S T . K I N D L E Y

Montes Calçados: A Step Ahead

Always trust the shoes.

In June 2017, Vitoria Montes, president of Montes Calçados (MC), a privately held Brazilian manufacturer of women’s shoes, was considering how MC should respond to the challenges it faced as sales and profits were projected to fall for the first time since 2009. Until 2017 MC had been growing at 3% per year, in line with industry averages. (Exhibit 1 contains financial information for MC.) Montes glanced out the window of her office above MC’s New York flagship store on Madison Avenue at 71st Street. As she watched the ubiquitous yellow cabs go by, she thought of the successful “yellow taxi” party pumps MC had introduced the previous year in one of its fashion launches.

Her key management team and many of MC’s retailers had assembled in New York for a three-day meeting. They had just reviewed MC’s designers’ proposals for the 2018 spring line. The many fresh styles were consistent with MC’s desire to bring “fast Brazilian fashion” to customers. She felt her retailers’ enthusiastic response indicated that MC would likely resume its 3% growth rate in 2018.

MC’s ability to produce shoe designs that clicked with young women and bring the shoes to market quickly had enabled it to grow and keep good partnerships with its retailers and franchisees. Montes was concerned, though, about declining sales in the United States and slower growth in Europe and Asia. MC’s retailers worldwide were feeling the impact of online shoe purveyors like Zappos and Amazon. Montes and her team had to confront if and how MC should sell into this channel.

Montes was also considering expanding MC’s retail base, now in 93 major cities worldwide, to smaller but rapidly growing cities like Charlotte, North Carolina; Cancún, Mexico; and Adelaide, Australia. This option would enable MC to grow more rapidly, but Montes and some of her team worried that making MC’s shoes more widely available would dilute the distinctiveness (and fashionability) that the MC brand conveyed.

Additionally, Montes wondered how far MC’s design and fashion sense could be stretched. Could MC reach older women without alienating its core 18- to 35-year-old customers? Furthermore, was

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

918-513 | Montes Calçados: A Step Ahead

2 BRIEFCASES | HARVARD BUSINESS SCHOOL

MC’s focus on Brazilian designs limiting the company’s growth? Virtually all of MC’s shoes were made in Brazil, and Montes regarded its Brazilian identity as vital to the brand. Expanding the design team to include talent from other countries could lead to a mixed perception of what MC stood for.

Montes Calçados History Renato Montes, Vitoria’s father, immigrated to Rio de Janeiro from Portugal in 1968. His father was

a skilled shoe craftsman and designer who had taught Renato the craft. Renato felt South America offered many opportunities, since Brazil was a major source for shoes worldwide, but he had trouble finding work in Rio. He got by doing shoe repair, along with other odd jobs, and spent his free time at the beaches of Copacabana and Ipanema. There, he became enthralled with the Brazilian design spirit that was constantly on display in apparel and footwear.

In 1972, Renato moved to Rio Grande do Sul, where one of the world’s major footwear industry “clusters” was located. He found work there doing artisan shoe design and contract production with a major footwear firm. Soon, Renato achieved financial stability. He also married Lillian Costa. Vitoria was born a year later.

In 1974, Renato designed a leather sandal based on his interpretation of Ipanema’s high style. The reception for it was extremely favorable. Lillian had a cousin in the shoe industry who helped Renato finance a startup to make Montes Ipanema Sandals. Lillian placed these sandals with several fashionable retailers in São Paulo and Rio de Janeiro, and the company achieved profitability quickly.

Lillian believed MC should focus on young, urban women (18–35), who desired affordable, distinctive, and on-trend shoe designs. The sandals, coupled with this strategic focus, laid the foundation for MC’s success. Versions of the Ipanema Sandals were still best sellers in MC’s line.

In 1985, a women’s shoe buyer from Nordstrom, a major U.S. department store, was visiting Rio de Janeiro and saw many women wearing MC’s sandals. She contacted Renato about purchasing them for Nordstrom. At that time, MC had sold only in Brazil and a few adjacent countries. MC’s sandals became a big hit for Nordstrom, which became MC’s largest customer.

With this success, MC began thinking about taking Brazilian shoes to the world. Fortunately, it could expand production rapidly through the network of subcontractors in Rio Grande do Sul that Renato knew well. Large shoe companies like MC usually had high-volume, well-rationalized production facilities for the items that produced the bulk of their revenues. However, subcontracting some lower-volume items enabled a company to offer a full range of styles and sizes while introducing and shipping new designs quickly. This capability also allowed MC to increase production rapidly when demand was high and decrease it rapidly when demand was low.

Subcontractors were required to have artisan skill, but not expensive equipment. In Brazil, where leather was the predominant material for shoes, subcontractors could count on steady work. In China and India, subcontracting was not as profitable nor as widespread. MC provided its subcontractor partners with raw materials and normally paid on delivery to ensure strong relationships.

Vitoria studied at New York University and the Fashion Institute of Technology. She worked for two years for Saks Fifth Avenue and then obtained an MBA from the Wharton School at the University of Pennsylvania. In 1999, she returned to Brazil to work at MC, where she spent several years in manufacturing and then in marketing. She became president of the company in 2012 when her father formally retired. Montes frequently commented that “shoes were in her DNA.”

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

Montes Calçados: A Step Ahead | 918-513

HARVARD BUSINESS SCHOOL | BRIEFCASES 3

The Montes family had operating control of MC, but the ownership included several investment firms and private individuals who had seats on the board. Renato had also put formal controls on the company, including the board, that forced it to operate like a public company. As a result, MC had avoided many of the issues that typical family businesses might encounter.

Worldwide Women’s Shoe Market In 2016, the global footwear market generated total wholesale (i.e., manufacturer) revenues of

approximately U.S. $216 billion, with an annual growth rate of nearly 3%.1 More than 15 billion pairs of shoes were sold. Women’s shoes accounted for about 60% of those sold, including athletic shoes, casual shoes of all types, go-to-work styles, and more formal shoes (pumps).

The U.S. Women’s Shoe Market

With $20 billion in annual (manufacturing) sales, the United States was the world’s largest market for women’s shoes. U.S. women annually bought an average of three pairs of shoes (not including athletic shoes) at an average price of $49 per pair. The average U.S. woman owned 17 pairs of shoes, but wore only three pairs regularly. 2 Eighty percent of U.S. women would tolerate pain in shoes for fashion and 14% had had an evening ruined because of uncomfortable shoes. 3

Brazilian Footwear

The Brazilian footwear industry began in Rio Grande do Sul, where German immigrants arrived in June 1824. The immigrants’ work emphasized craftsmanship, especially for leather goods. Handmade production prevailed until the late 19th century, when the shoe industry became more volume-oriented alongside the development of tanneries.

Brazil accounted for about 6% of global footwear. It produced over 900 million pairs of shoes a year and was number three in the world behind China (13 billion pairs) and India (1.2 billion pairs). Brazil exported 250 million pairs of shoes to over 120 countries. The Brazilian shoe industry employed over 300,000 people in several manufacturing clusters in over 7,000 firms.4

Competitors

Thousands of manufacturers, from simple artisans to huge firms like Nike, VF, and Wolverine, competed for a share of the billions of pairs of shoes sold annually. Hundreds of brand names, such as Vans, Toms, Jimmy Choo, Gucci, Clarks, etc., vied for shelf space worldwide. Success depended on designs, marketing, distribution, and price. Entry barriers to many segments of the shoe industry were low, and companies came and went constantly. Shoe companies with longevity usually had an iconic product, like Sperry Top Siders, Clarks Desert Boots, or Bass Weejuns.

1“Global Footwear Market: Key Players Plan on Expanding Product Portfolio, notes TMR,” https://www.transparencymarketresearch.com/pressrelease/footwear-market.htm, accessed January 18, 2018. 2Tamara Abraham, “Head over heels: How the average U.S. woman owns 17 pairs of shoes (and most of them are flats),” http://www.dailymail.co.uk/femail/article-1366553/Head-heels-How-average-U-S-woman-owns-17-pairs-shoes-flats.html, accessed January 18, 2018. 3“Ninety percent of American Women Own Painful Shoes,” https://apparelmag.com/ninety-percent-american-women-own- painful-shoes, accessed January 18, 2018. 4Euromonitor International, “Apparel and Footwear in Brazil,” http://www.euromonitor.com/apparel-and-footwear-in- brazil/report, March 2017, accessed January 2, 2018; Paul Bruha, “Footwear Industry in Brazil,” The Brazil Business, October 14, 2014, http://thebrazilbusiness.com/article/footwear-industry-in-brazil, accessed January 2, 2018.

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

918-513 | Montes Calçados: A Step Ahead

4 BRIEFCASES | HARVARD BUSINESS SCHOOL

Over 600 Brazilian shoe manufacturers competed in Brazil, Latin America, the United States, and worldwide. Montes and her team had admired one of Brazil’s most famous footwear companies, Havaianas,5 and felt MC’s history and current strategy had much in common with it. She felt that MC’s competitive advantages, in addition to its manufacturing and subcontracting expertise, were a result of its “made in Brazil” and “Brazilian design” emphases, although its success was clearly rooted in a fashion sense of its target market that correctly exploited the Brazilian advantages.

Customers

The women’s market for shoes worldwide was segmented along numerous dimensions, such as income, occupation, geography, education, and lifestyle. Shoes could be classified by type and usage occasion. Younger women (18–35) prioritized fashion, style, and design; older women (35+) emphasized comfort. Yet even seniors (60+) rated style and “makes me feel attractive” highly.

Montes defined MC’s core target market as younger women who were trendsetting, professional, and stylish, yet practical, who sought “with-it” design at affordable prices. She also felt her customers wanted individuality in their footwear and found it in MC’s distinctive Brazilian designs. MC’s actual customers had shoe preferences that varied widely by country and even by city within specific countries. Montes also knew that MC’s total customer base was much broader than its target, with women over 35 making up at least 40% of the company’s sales.

Montes believed MC’s target market had two consumer behaviors in common. First, they were hard to predict and influence. They could be swayed by factors such as celebrity fashion, friends’ fashion choices, and the need to differentiate themselves in a crowded urban environment. Fashion “misses” were thus common, and big hits were rare.

Second, fashion cycles could be very short. In part, this trend resulted from fashion providers introducing new items more often. 6 New items gave consumers a reason to keep coming into stores, but buyers’ expectations pressured manufacturers to find “the next big thing” faster.

MC’s Product Line

Women’s shoes came in many forms, styles, materials, and designs. MC capitalized on Brazil’s strength in the production of leather, but its designers thought expansively in combining materials as they searched for new, fresh designs.

Because shoes had to come in many sizes, 7 even a simple addition to a line, such as a color or style, significantly increased the number of stock keeping units (SKUs) a manufacturer had to make and a retailer had to carry. With over 15,000 SKUs, MC had developed sophisticated product and supply- chain management.

MC employed 17 designers and several artisans at its headquarters in São Paulo. It also had five designers in New York City along with its U.S. marketing staff. MC expected its designers to travel often to major cities throughout the world, working with its key retailers, listening to customers, and discerning the latest fashion trends. The designers were responsible for introducing two major lines a

5 Havaianas started in 1962 marketing the “original” flip-flop. The company was recently sold to a Brazilian banking consortium for $1.1 billion. It sold an estimated 200 million pairs of mostly simple rubber shoes and sandals annually. 6 Kasra Ferdows, Michael A. Lewis, and Jose A.D. Machuca, “Rapid-Fire Fulfillment,” Harvard Business Review, November 2004, R0411G. 7 Zappos lists 17 women’s shoe sizes for the United States. The sizes are slightly different in the United Kingdom and Europe.

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

Montes Calçados: A Step Ahead | 918-513

HARVARD BUSINESS SCHOOL | BRIEFCASES 5

year and for coming up with special designs from time to time in collaboration with certain retail partners.

Pricing

MC’s retail prices ranged from $35 to $300. Montes felt MC’s pricing supported its unpretentious but stylish market position. The average wholesale price shown in Exhibit 1 was around $32, and the average retail price was close to $100. Discounts and special promotions were common for footwear; closeouts and markdowns could lower prices by 60%.8 MC’s volume of fashion misses was about 20%, on par with the industry average. Successes could die quickly, or become classics and remain in the line for years. The latter items often had margins 10 to 15 percentage points higher than average due to economies of scale and manufacturing efficiencies gained over their long product life cycles.

Marketing Communications

Integrated marketing communications helped create the desire for MC’s products. MC budgeted about 3% of sales to its marketing programs. It used several vehicles, like social media, public relations, and fashion magazines, plus visibility at celebrity events like the Emmy Awards. In-store signage reflected MC’s Brazilian character, and retailers received support for local advertising. MC also ran full-page ads in several fashion magazines with a global reach, such as Vogue. Most of MC’s ads featured a product worn by a model, and had a sophisticated look that highlighted MC’s Brazilian image. Montes felt her staff got exceptional leverage with MC’s budget and was not considering any changes to its advertising and promotion programs.

Retailers and Retail Partners

MC’s early success in Nordstrom, considered a fashion leader by other retailers, made it much easier for the company to gain wide distribution with other key retailers around the world. This access enabled MC to grow rapidly through the 1980s and 1990s.

MC also developed close relationships with prestigious retailers throughout the world as it grew. In 2017, it sold its shoes through over 4,000 retail “doors.” Nordstrom, for example, had 165 stores, or doors, that carried MC. Renato had long ago limited distribution to the most fashion-forward cities, such as Tokyo, Beijing, Singapore, Milan, Paris, and London. MC usually granted some exclusivity to its retail partners in those areas in return for good placement within these stores. For example, in Chicago, MC sold through Nordstrom and Saks, but not through Neiman Marcus. It also picked certain small retailers, like Florodora, which would promote its shoes heavily.

In 1992, MC opened some freestanding stores, which displayed MC’s full line, something none of its other retail partners could do. The first flagship stores were very successful, and MC opened them by working out franchising or licensing agreements with entrepreneurs in major markets. As of 2017, MC had 62 megastores under license, which accounted for more than 15% of MC’s total sales.

MC had majority ownership in eight of these stores and often used them to test new designs and observe and listen to consumers. The managers of these stores were trained to visit competitors discreetly to observe trends in women’s shoes in their markets and report their impressions back to MC’s design team. In addition, all MC store owners were encouraged to provide feedback on the success or failure of new designs and trends in their marketplace.

8 Casewriter estimate.

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

918-513 | Montes Calçados: A Step Ahead

6 BRIEFCASES | HARVARD BUSINESS SCHOOL

MC operated a large distribution center near São Paulo that serviced its retailers worldwide. Having just one distribution center enabled MC to ship to retailers efficiently, with considerable control over, and understanding of, what styles were selling where.

MC used several hundred subcontractors to manufacture shoes in small batches to supplement its high-volume manufacturing facilities. It could move a new item from concept to market quickly and decide whether committing more production to an item was viable. Most of its retail partners wanted to be first with the new styles. Their buyers worked with MC to provide insights about trends and competition. MC sometimes produced exclusive designs from these collaborations that participating retailers would have to themselves for six to eight months before MC distributed them more widely.

Retail displays of shoes required little space, as a store would usually display one shoe of a certain style and color and keep inventory off the showroom floor. Consumers needed a space to try on the shoes, but little else. Women tended to like retail help in selecting fashionable items and usually tried numerous styles before purchasing.

MC’s Options for Growth: Meetings with Its Designers, Managers, and Retailers

Vitoria assembled her team at the showroom to discuss MC’s main challenges and opportunities. The participants included Bryan Vasquez, head of operations; Alana Santos, head of sales; Ashley Corrigan, manager of the MC New York store; Bernadette Durand, MC licensee for Paris; Kiku Yoshida, MC licensee for Tokyo; and Carlos Eduardo Flores, head of design. Montes expected a lively discussion.

The “Omni-Channel” E-commerce Challenge

The first item on Montes’ agenda was to determine whether to sell online. Through Zappos and other companies, 9 direct sales of women’s shoes in the United States and Europe were growing rapidly. Ecommerce was also growing quickly in Asia and South America.

Yoshida argued, “MC’s retail partners will suffer from lost sales, and the MC brand will be degraded. Some retailers may lose more than 20% of their sales and would need to find other sources of revenue to survive. If MC sells online, it should be only for weaker items, like last year’s styles.”

In contrast, Santos stressed, “MC’s key customers are increasingly heavy online shoppers. They are fashion loyal, not brand loyal. MC can reverse the erosion of sales through this channel. Online firms could carry all MC’s line and promote fashionable new items faster than traditional retailers.”

Montes had open purchase orders from Zappos and other online retailers for the United States. She felt that these accounts could sell more than $5 million in the United States alone in 2018. She guessed that U.S. retailers would lose 10% to 20% of their sales, depending on how many products MC put online. She wondered how to manage this opportunity, which MC would implement globally if it succeeded. She wondered if retailers could partner with MC in this channel.

9Amazon recently purchased Zappos, but had left it as a stand-alone business, even though Zappos competed with Amazon in the shoe market.

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

Montes Calçados: A Step Ahead | 918-513

HARVARD BUSINESS SCHOOL | BRIEFCASES 7

The Expansion to Smaller Markets

The next item to discuss was the possibility of MC opening many more stores in smaller cities across the globe. Santos spoke to this opportunity, “If MC opens accounts in smaller cities, we could double the number of doors MC sells through. Sales could increase by 50% or more by 2020.”

Montes countered, “We would love to have the volume, but this move is risky, as Coach, Michael Kors, and many other companies discovered. Do we really want to become available everywhere? My father always said that ‘familiarity breeds contempt; scarcity creates desire.’”

Corrigan added,

“If we distributed widely, our core customers would stop supporting the brand because of this familiarity. I believe we will have to lower prices to compete in smaller markets, where market research suggests customers are typically more price-sensitive and are more willing to wait for apparel and shoes to go on sale. By 2020, margins would probably be under 45% if we opened more retailers in these markets. Our margins will remain the same, and sales should increase 3% annually even if we do not pursue this opportunity.”

The conversation went on for an hour, with each side arguing its position. Wrapping up, Montes noted, “The chance for rapid growth is appealing, but risky. Our investors need to give their input.”

The Ongoing Fashion Challenge

Montes then laid out the next challenge facing MC. Consumers had turned their backs on many once-hot brands, such as retailers like Gap, often for reasons that were hard to discern. Montes asked, “Should we pursue a fashion strategy or try to build more on our long-running iconic styles?”

Flores asserted, “MC has talented designers and a close-to-the-customer focus that is working well. Brazilian design is hot and getting hotter. If we have four fashion cycles annually and increase advertising to 5% of sales, we can increase our growth rate to about 10% and our gross profit margins from 59% to over 70% by 2020 on the 50% of our total sales coming from fast-fashion items.”

Montes felt 50% of MC’s sales would be sold at full retail prices and that these sales would grow at 3% per year. This option would increase the misses, but she believed the percentage would go to about 25% and could be managed so that MC did not lose too much money on them. They also estimated that discounts and allowances would increase to 9% of the 50% of fast-fashion sales.

Corrigan spoke in support of Flores, “the MC marketing team and its retail partners support upping the new product introductions to four times per year. This will give consumers reasons to shop more often in the stores. Vitoria, I’ve known your father and mother for a long time. They feel that bringing affordable, high-fashion Brazilian shoes to the world is and always has been MC’s mission.”

“However,” Vasquez argued, “shoe brands with staying power all have a classic style that always sells, which is augmented by new lines and designs once or twice yearly. MC is like these ‘classic’ brands. It has succeeded by having core classics—sandals and espadrilles—flanked by hot, trendy, urban fashion items that come and go. MC gets more than 30% of its sales and 40% of its profits from products with roots in its early years. Adding more SKUs more often will stress our capabilities.”

For the exclusive use of H. Bello, 2021.

This document is authorized for use only by Hello Bello in MARK 588 taught by HUA MENG, Longwood University from Jan 2022 to Feb 2022.

918-513 | Montes Calçados: A Step Ahead

8 BRIEFCASES | HARVARD BUSINESS SCHOOL

Montes wondered if MC should embrace its classics. She felt doing so would make expanding distribution to smaller cities more feasible and require the company to maintain “Brazil” as part of its identity and brand, but with a new emphasis on craftsmanship and quality rather than fashion.

Montes was also concerned that introducing new designs more frequently might be riskier than Flores and the team thought. She wondered what the percentage of misses and discounts would be before this option was untenable. This path might enable MC to grow quickly, but long-term growth would likely fall back to 2–3% annually as customers became less able to absorb more new products. Perhaps some passionate conversation during dinner at Via Carota would clarify these issues.

The Aging Demographic Challenge

The meeting started promptly at 9:00 a.m. the next day. The first topic concerned the core of MC’s strategy, its target market focus. Its target customers were 18- to 35-year-old women, but its actual customer base was much wider. The discussions about embracing older consumers had been heated.

Corrigan asserted, “MC’s retailers are strongly opposed to visibly embracing older women. We feel that our customers aspire to stay young and want to feel on-trend in their purchases, often at the expense of comfort. MC risks becoming a ‘mom’ brand if it openly solicits older women.”

“Vitoria, I know you are pleased that your father’s designs still have wide appeal,&#x20

Collepals.com Plagiarism Free Papers

Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.

Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS

Why Hire Collepals.com writers to do your paper?

Quality- We are experienced and have access to ample research materials.

We write plagiarism Free Content

Confidential- We never share or sell your personal information to third parties.

Support-Chat with us today! We are always waiting to answer all your questions.