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Hush Puppies Chile

In July 1992, Ricardo Swett age 50, could look back on a decade of exceptional growth of his family-owned Hush Puppies line of casual shoes and retail outlets in Chile. Unlike the parent company which had experienced serious difficulties in the 1980s, Hush Puppies in Chile had seen profits climb and sales explode by an average of 30% per year since 1985. By emphasizing excellence in design and by developing a chain of up-scale retail shoe stores as well as an efficient factory, Hush Puppies had become the favorite brand of upper-class Chilean men. Expansion into womens and childrens shoes during the last three years had also been successfully implemented. As the companys market position in Chile soared, Ricardo Swett, who served as general manager of Hush Puppies in Chile, began to contemplate further expansion in other Latin American markets. The company had recently established a limited presence in Uruguay, Bolivia and Paraguay and was beginning to enter Argentina with its line of Brooks athletic shoes. Ricardo was uncertain how fast the company should expand in these countries or whether efforts should be focused instead on promoting exports to North America or on consolidating the companys market position in Chile. Ricardo was also wondering about expanding into other retailing concepts in Chile including athletic and outdoor clothing stores as well as childrens shoes and apparel. In contemplating how and when to proceed, Ricardo recognized that key family members were waiting for a recommendation.

Company Background
Hush Puppies Chile began operations in 1980 through the concerted efforts of three brothers, Alfonso, Ricardo and Juan Pablo Swett. In the early-1960s, the three brothers formed NORSEG, a start-up company that supplied safety equipment to industrial and mining sites throughout Chile. With rising sales and a healthy cash flow, the brothers gradually expanded operations to include real estate development, several agricultural projects and a 10% equity position in Elecmetal S.A., one of the largest industrial companies in Chile. Over time, these operations were organized as separate companies under the family-owned Costanera S.A.C.I. Holding Co.

Copyright 1993 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professor Allen J. Morrison, The American Graduate School of International Management, and Professor James Bowey, Bishops University, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. Certain identifying information may have been disguised to protect confidentiality.

Wolverine World Wide

In the spring of 1979, the three Swett brothers were informed by their advertising agency, Veritas Ltd., that Wolverine World Wide was interested in expanding into Chile. Wolverine, based in Rockford Michigan, controlled a portfolio of footwear brands including Hush Puppies casual shoes, Wolverine work and outdoor boots, Bates uniform shoes, and Brooks athletic shoes. Incorporated in 1954, Wolverine traced much of its initial success in footwear markets to its reliance on the production of casual pigskin shoes. In the mid-1950s, Wolverine developed a new elaborate pigskin tannage technology to take advantage of the characteristics of fine grain pigskin and in 1958 introduced Hush Puppies casual pigskin shoes. During the 1960s and 1970s, Hush Puppies emerged as a major brand with particular strength in the mens segment. The infamous basset hound became a widely recognized symbol for quality and comfort. Success in the U.S. was followed by international expansion, initially in Canada and Europe. In the early 1980s, spurred by fears that the U.S. government might lift import quotas on low cost shoes from the Far East and Latin America, Wolverine moved to accelerate its international expansion. By 1992, Wolverine World Wide had established joint ventures or licensing agreements in over 40 countries including most of Europe, Japan and South America. In Chile, Wolverine was looking for an agent to import or manufacture Hush Puppies brand shoes under license. In response to Wolverines initiatives, the Swett brothers commissioned market research studies which revealed that the Chilean shoe market was dominated by formal, dressy products and that no companies effectively met the demand for casual shoes. The market research also indicated that Bata, a large Canadian-owned shoe company with worldwide operations, controlled an estimated 60% market share in Chile. Bata Chile operated primarily as a manufacturing company which sold the bulk of its output to small independent stores throughout the country. Independent retailers had considerable power over manufacturers in controlling which brands to promote and which styles to display. Bata also operated several dozen of its own retail stores throughout Chile and was rumored to be considering further expansion. Like most Chileans, Ricardo, Alfonso and Juan Pablo believed that the open market of 1980 provided an ideal opportunity to start a new business. The brothers were particularly interested in the upper class market in Chile which, by exposure through international travel, was familiar with the Hush Puppies brand, quality and unique designs. Wolverine World Wide also appeared to be an open company; its managers were supportive and personable. The brothers agreed that any venture with Wolverine would succeed.

A Move to Retailing
In working with Wolverine, the brothers decided early on that retailing provided the best option for getting Hush Puppies into Chile. According to Renato Figueroa, Commercial Manager of Hush Puppies Chile in 1980,

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Manufacturers risked their efforts, their capital and their futures, while the retailers had control of the market. . . . Retailers treated all brands alike, not giving special treatment to any brand in particular. [We came to the conclusion that] the best way was to build our own store chain. . . . Our decision was based on the notion that we would be able to influence and handle the market. We would know our consumers. This would enable us to place Hugh Puppies in a different position from the rest of the competition in Chile.

After negotiations with Wolverine, Hush Puppies Chile was given exclusive rights to import Hush Puppies shoes and develop retail outlets in Chile. Although no up-front fees were paid to Wolverine, the brothers committed to opening as many as 25 retail stores within three years. Expectations were that the costs for the first five stores, including leasehold improvements, training, inventories and so on, would total about $2.0 million. Of this amount, about $1.0 million would be borrowed. The remaining $1.0 million represented a substantial risk to the brothers. As agreed, stores were designed as family concept outlets in which both parents and children could find comfortable, casual shoes. The best Hush Puppies shoes would be imported from around the world with about 80% coming from the U.S. The target market was identified as high income consumers representing the ABC1 market (top 10% of wages earners) in Chile. Given the stratification of wealth in Chile, these consumers compared favorably with upper-middle and upper class U.S. consumers. However, a major difference was that wealthy American consumers were generally not targeted by Hush Puppies in the United States. Stores were situated in large, convenient locations primarily in the Santiago metropolitan area. The sales staff was extensively trained to better relate to the upscale customers and were well compensated, reflecting the desire for continuity and professionalism. Shoe prices were set at a 10% premium over average shoe prices and were the same in every store. In distant locations in Chile, the plan was for Hush Puppies Chile to grant franchises to independent retailers. As agreed upon by the brothers, Ricardo assumed responsibility as the general manager of Hush Puppies Chile. Juan Pablo Swett assumed responsibility as the general manager of NORSEG Chile. Alfonso was involved in major investment decisions and strategic planning for all family owned businesses as well as some day-to-day decision making at Hush Puppies Chile. By early 1982, Hush Puppies Chile had established seven shoe stores in the greater Santiago area.

A Move into Manufacturing

After several years of promising economic growth, the bottom fell out of Latin American economies in 1982. Hit by slumping commodity prices, massive national debt, soaring interest rates, and worldwide recession, the Chilean economy, like every other in Latin America, plunged into a state of depression. In Chile, the GNP fell by 14% in 1982 alone. Between the 1982-1985, unemployment officially hovered around 14%; unofficially, it surpassed 30%. During the same period, the Chilean Peso dropped by 300%, leading to a commensurate rise in import costs.

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With Hush Puppies Chile totally reliant on imported shoes, the company was devastated by the economic downturn. Only two options appeared possible: shut down in the face of massive losses or move into manufacturing. According to Alfonso and Ricardo,
We believed in the brand. The consumer liked it. As a result, we had no choice but to get into manufacturing. All our businesses have always been very conservative with low debt load. So we werent at real risk in the downturn. We saw the business in the long term. Besides, we could get into manufacturing inexpensively as everyone else was getting out, so real estate was cheap.

In April 1982, the decision was made to move Hush Puppies Chile into shoe manufacturing. In November 1982, a partnership was formed between Wolverine World Wide and Hush Puppies Chile with 70% of the manufacturing joint venture owned by Hush Puppies Chile and 30% owned by Wolverine. Both partners agreed to contribute representative amounts of capital to ensure that manufacturing output met growth targets. From Wolverines perspective, a manufacturing facility in Chile made sense for a number of reasons. In 1981, import quotas ended in the U.S. and Wolverine moved aggressively to shift production overseas. Under the joint venture agreement with Hush Puppies Chile, Wolverine would have access to a new source of shoes made with low cost Chilean labor. The U.S. company would also receive royalties on Hush Puppies sales as well as benefit from profit sharing from the Chilean production facility. Finally, Wolverines wholly-owned Puerto Rican affiliate would become an ongoing supplier of some selected components for the Chilean operation. In February 1983, a small new manufacturing facility was opened in suburban Santiago which included approximately 10,000 square meters of manufacturing capacity, a two story executive office complex and factory retail outlet. Manufacturing, import and export sales were handled by Hush Puppies Chile, Ltd. Retail operations were organized under the separate company name of Commercial Puppies, Ltd. Hush Puppies Chile and Commercial Puppies were both organized with their own board of directors, which included the three Swett brothers, as well as a small group of trusted, Western-educated managers from the operating companies. Most directors served on two or three boards. Strategic decisions were made at the board level and passed down to the operating company general managers. While both Hush Puppies Chile and Commercial Puppies were recognized as separate companies with their own functional structures, managers worked closely together to coordinate activities.

Rapid Growth
By 1985, the Chilean economy started to turn around and from 1985-1990 the company enjoyed rapid growth. In 1985, Hush Puppies added Brooks athletic shoes to fill out its product line. Brooks Athletic Shoes was owned by Wolverine and had benefited in the U.S. by the upsurge in interest in physical fitness. While some of the Brooks shoes were to be manufactured in the Santiago area, most were to be imported from the Far East. It was

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anticipated that about 70% of the Brooks shoes distributed in Chile would be sold to outside retailers; the remaining 30% would be sold in Hush Puppies shoe stores. As overall sales picked up, Hush Puppies Chile and Commercial Puppies focused more on building and maintaining key brands. The objective was to develop a reputation for excellence in marketing by emphasizing advertising, service and style. Feedback from retail stores proved a major strength in focusing design and manufacturing on consumer needs. Hush Puppies Chile managers regarded the company as market oriented as opposed to manufacturing oriented, thus differentiating the company from many Far East suppliers. By the end of 1985, Commercial Puppies was managing 22 company-owned stores and Hush Puppies Chile was supervising four franchise stores. To strengthen marketing efforts, advertising budgets were expanded, reaching 5% of sales in 1987. In 1987, the company started a major advertising program titled the pleasure of walking which was particularly appealing to increasingly health conscious upper and upper-middle class Chileans. Follow-up multicolor ads promoting Hush Puppies line of outdoor casual and hiking boots were placed in major newspapers and top magazines throughout the country (see Exhibit 1). Television advertisements were also developed which focused on Hush Puppies as statements of quality and style. During the late 1980s and early 1990s, Hush Puppies Chile won three annual Wolverine World Wide awards for the quality of its advertising campaign and marketing strategy. The companys strategy to strengthen the Hush Puppies brand succeeded. By the end of 1987, the production of shoes reached 265,000 pairs, an increase of 18% over 1986. In 1988, production increased an additional 15% to 305,000 pairs; in 1989, shoe production was up 29% to 392,000 pairs. Despite these impressive gains, the company remained relatively weak in two important categories: womens shoes and childrens shoes. In an effort to reposition itself in these fast-growing segments, several bold initiatives were undertaken in the late 1980s.

A Move into Womens and Childrens Shoes

To strengthen the companys position in the womens shoe market, more effort was devoted to product design and marketing. The womens product manager, Cardina Schmidt, believed that prior to 1990 the womens product line had not adequately satisfied the style and fashion demands of Chilean women. Good design was particularly important in the womens segment in which styles changed nearly every six months. Women in the target segment were particularly fashion conscious and were generally familiar with the newest fashions in Europe and North America. In order to make Hush Puppies more appealing to women, high fashion shoes were imported from Italy, France and Argentina. Hush Puppies Chile also hired exclusive designers to develop its own collection of womens shoes. Designers and managers regularly visited Hush Puppies stores to question women on desired design features like colors and styles. New window displays were designed to establish a more stylish image and a major televi-

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sion advertising campaign was launched. As a result of these efforts, sales growth in the womens segment increased dramatically. During this same period, the company also undertook a major initiative in childrens shoes. The history of the companys efforts with childrens shoes was reported by Sebastian Swett, a second generation family member and Product Manager for childrens shoes,
Surveys detected great opportunities for us in the childrens market. The market was very traditional. It offered old models in brown or white. . . . The market seemed willing to pay a higher price for shoes with aggressive colors and concepts such as comfort and security. . . . We had a few advantages such as the excellent Hush Puppies image which was attractive for children and easily identified. . . . We also had several disadvantages. Our stores were not appropriate for selling kids shoes; other competitors had years in the market; [and finally] we didnt have the machinery to develop a great collection for kids up until 12 years in age.

In early 1990, Hush Puppies for Kids was launched, consisting of four different categories which varied according to the age of the child. Soft Puppies shoes were introduced for infants; Little Puppies were designed for children age one to three years; Young Puppies were introduced for children age four to eight years; and finally, Junior Puppies were designed for children age nine to fourteen years. The introduction was accompanied by extensive television advertising. Hush Puppies for Kids was an immediate success.

Strengthening the Athletic Position

By the summer of 1989, Brooks was positioned as the number three brand in the Chilean athletic shoe market after Diadora and Adidas. In the U.S., however, Brooks was a relatively weak brand, a fact not altogether lost on fashion-conscious Chilean adolescents, and L.A. Gear was emerging as the top brand for adolescents. L.A. Gear was a relative new comer in the athletic shoe industry and, to capitalize on its increasing popularity, had begun to search for international distributors. The opportunity to market a more fashionable brand in L.A. Gear was clear and Alfonso approached the company in the summer of 1990. After considerable discussion, L.A. Gear agreed in the Fall of 1990 to work with Hush Puppies Chile to bring the L.A. Gear brand to Chile. L.A. Gear shoes would be imported from U.S. inventories or directly from the shoes manufacturers in Korea and China thus sparing Hush Puppies any manufacturing risks. Hush Puppies Chiles intention was to consolidate the L.A. Gear operations with those of Brooks; however, L.A. Gear insisted that Hush Puppies Chile create a distinct sales company to maximize the brands potential. Wolverine World Wide was also very concerned about the impact that the L.A. Gear initiative would have on Brooks in Chile. In response, Costanera created Topsport to manage the sale of L.A. Gear. A separate company, Coast Sport was organized to manage all Brooks sales. It was hoped that creating separate companies for athletic shoes would allow greater focus on Hush Puppies brands as well as encourage new sales initiatives for athletic shoes.

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Wolverines Manufacturing Position is Purchased

In December of 1991, Costanera acquired the 30% of Hush Puppies Chile operations owned by Wolverine World Wide. The buyout was prompted by Wolverines failure to support Hush Puppies Chiles ambitious expansion plans. During late 1989 and 1990, manufacturing facilities were increased over 30% in Chile in order to keep pace with booming demand. Plans called for production capacity to be increased by another 20% in 1991. New investment requirements in Chile as well as other countries, combined with the need to reinvest profits, translated into a negative cash flow for Wolverine. At the same time, Wolverine was facing changes in the business in the U.S. and was struggling to conserve capital. As a result, a buyout became an attractive option for both parties. The purchase of Wolverines 30% share of manufacturing was estimated to have cost Costanera approximately $3.6 million. With the buyout complete, Hush Puppies Chile changed its name to Forus, S.A. In January 1992, the name of Commercial Puppies was changed to For-Shop, Ltd. Exhibit 2 provides a full organization chart for Costanera Holding. Under the terms of the acquisition, Wolverine extended its licensing agreement to Forus for twenty years. In addition, Forus pushed for and received the rights to manufacture and sell Hush Puppies brands in Bolivia, Paraguay, and Uruguay. Forus was also licensed to sellbut not manufactureBrooks athletic shoes in Bolivia, Paraguay, Uruguay, Chile, Argentina, and Peru. Outside these countries, sales of Hush Puppies or Brooks brand products could only be made to other Wolverine licensees. For Wolverine, Costaneras program for growth, endorsed by the success obtained in Chile, made it the best company to build sales in Latin America. Increased sales in the region would mean higher royalties to Wolverine as well as an increase in the export of raw materials. After the buyout, the relationship between Costanera and Wolverine remained strong. Both companies continued to share designs and coordinate product introductions. Forus also remained a major purchaser of leather and leather products as well as Brooks shoes. Exhibit 3 reports the extent of business relations between Forus and Wolverine World Wide over a six year period.

Broad Market Appeal

By the end of 1991, Forus had succeeded in significantly broadening the market appeal of its Hush Puppies brands. In the ABC1 mens market, Hush Puppies was number one in market share; in the ABC1 womens market, Hush Puppies was number five in market share; and in the ABC1s childrens market, Hush Puppies was number four in market share. Market mix for the ABC1 segment and Hush Puppies brand sales ratios on a unit volume basis are included in Figure 1 below.

Growth in Retail Operations

By the end of 1991, total retail sales of Hush Puppies, Brooks and L.A. Gear shoes amounted to 328,000 pairs. About 74% of these shoes were sold in 25 company-owned stores. An additional 9% of sales was generated through Hush Puppies Corners which had been
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FIGURE 1 ABC1 Segment Mix and Hush Puppy Sales Mix (year end, 1991) ABC1 Market Mix Men Women Children 24% 47% 29% Hush Puppies Sales Mix Men Women Children 46% 30% 24% Hush Puppies Market Share Men Women Children 30% 8% 11%

established in shoe departments of 14 major retail department stores. In promoting Hush Puppies Corners, For-Shop agreed to train sales employees and assist in designing and setting up displays. About 10% of the companys sales was also generated through small independent retail outlets. Franchise sales represented approximately 7% of total retail sales. In 1991, the company had five franchise stores located in isolated cities in Chile. By the summer of 1992, the number of company-owned retail stores in Chile had increased to 26 with four more planned by year-end. Exhibit 4 presents retail sales data for 1990 and 1991, as well as projections for 1992.

International Expansion
Although the Swett brothers were pleased with Hush Puppies overall growth in Chile, they were constantly reminded of their sense of vulnerability in the early 1980s. Certainly Costanera was a much more balanced company by mid-1992 than it had been ten years earlier. It had a healthy balance sheet, a portfolio of popular American brand names, improving manufacturing capabilities, world class design skills and substantial marketing expertise. Despite these advantages, Ricardo and several managers began to realize that the depth of Hush Puppies Chiles market penetration, particularly in the ABC1 mens casuals would lead to increased competition from new European and American brands. With these concerns in mind, Ricardo began considering other alternatives for growth. A move into mens dress shoes was rejected because the segment was already highly competitive and because managers at Hush Puppies Chile did not believe that their skill base would provide the company with a significant competitive advantage. However, other opportunities for growth were being seriously studied. These included growth by expanding exports to North America and Europe and growth through product and market diversification in South America.

Export OpportunitiesNorth America

Since it began manufacturing almost 10 years earlier, Hush Puppies Chile had always hoped to develop a strong export business, particularly to North America and Europe. Success in exports seemed likely given Chiles comparative advantage of low-cost labor and Hush Puppies Chiles excellent styling and product-development skills. Hush Puppies Chiles manufacturing labor costs in 1991 averaged $2.00/hr. including all benefits; in neighboring Argentina, wages in the shoe industry averaged from between $2.25 and $2.50 per hour. In
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addition to being at least comparable in terms of costs, the quality and consistency of Chilean labor was generally regarded as superior to that available in neighboring countries. From a company perspective, an emphasis on exporting seemed to make sense for two reasons. First, sales to the Northern Hemisphere could potentially offset cyclical sales in the Southern Hemisphere. Forus was typically over capacity in the period leading up to Fall/ Winter (February through July) and under capacity in Spring/Summer (August through January). Any additional export sales during the off-season would provide a better utilization of plant and equipment while minimizing fluctuations in employment levels. Second, the additional export sales volume would contribute to ever-increasing manufacturing and new product development overheads, thereby boosting overall profits. Despite the appeal, exports to North America and Europe remained relatively modest. One problem was that exports from Chile were expected to compete with much lower cost footwear from China, India and the Philippines. Hush Puppies domestic target market was also the high-end segment which added design and service costs that negated many of Chiles labor cost advantages. Also, Hush Puppies Chiles very diversified product line increased per-unit production costs through short production runs while at the same time removing opportunities for high volume exports. A final problem was that direct and indirect labor costs represented only about 25% of total manufacturing costs thus limiting the companys ability to pursue a low cost exporting strategy. Because of these difficulties, several managers in the company believed that an export strategy built on superior design and marketing had the most chance to succeed. Others disagreed, arguing that if Hush Puppies Chile were serious about substantially increasing exports to North America and Europe it would have to develop lower priced shoes. Such a move would also open additional mass market opportunities for the company in Chile. The company had never seriously considered shifting manufacturing to lower cost Asian countries. Difficulties in controlling overseas production and the need to respond to rather fickle customer needs undermined the potential savings of overseas manufacturing. Managers at Hush Puppies Chile also believed the company had no competitive advantage in importing. Estimates for 1992 were that the company would import about $U.S. 3.0 million in raw materials (mostly soles and leathers) and about $U.S. 1.7 million in finished shoes. The U.S. would supply approximately 25% of these imports with the rest coming from the Far East, Argentina, Brazil, Italy, Spain, Germany, Mexico and the U.K.

Opportunities in Latin America

From 1987 to 1991, the average annual sales growth for Forus, For-Shop and Coast Sport was 20% per year. From 1990 to 1991, sales growth accelerated to a staggering 35%, encouraged in part by the rapid growth of the Chilean economy. Strict adherence to free markets and free trade had lead to booming economic growth in Chile with the economy expanding an average of 6% per year from 1987 to 1992. Many economists were predicting GDP growth of 10% per annum throughout the remainder of 1992 making Chile one of the fastest growing economies in the world and an engine of economic growth in the region.

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(For a brief overview of Chiles economic development over the last two decades, see Exhibit 5.) The companys initiative in Latin America began in earnest in May of 1989 when Hush Puppies Chile began exporting Hush Puppies shoes to Uruguay. With air freight to Uruguay averaging about $U.S. 0.55 per kg., transportation costs appeared favorable for exports. By the end of 1989, the company had sold just over 19,000 pairs of shoes in a country with a population of more than 3 million. In 1990, Hush Puppies Chile granted exclusive franchise rights to the Moliterno family, a diversified industrial company based in the capital city of Montevideo. Moliterno quickly established Hush Puppies Uruguay as a wholly-owned subsidiary. During 1990, three Hush Puppies retail outlets were opened, two in Montevideo and one in Maldonado. Despite high ambitions, sales remained weak. Ricardo was convinced that Moliterno, with little experience in retailing, had chosen less than optimal retail locations. Stores were poorly maintained and Moliterno spent essentially nothing on Hush Puppies advertising and promotion. Sales were also hurt by competition from low priced footwear exported by financially strapped manufacturers in Argentina and Brazil. In the Spring of 1991, Forus purchased 55% of Hush Puppies Uruguay. According to Ricardo, Hush Puppies Chile had always wanted to be a partner with Moliterno. The original agreement included an option to buy a majority stake in Hush Puppies Uruguay that Forus decided to exercise. Under the terms of the investment, Forus and Moliterno contributed $U.S. 400,000 to create a new company called Hush Puppies Uruguay S.A. which in turn purchased the Hush Puppies related assets of Moliterno. After gaining effective control over retailing, Hush Puppies Chile moved to strengthen operations. Sales employees received additional training and new store locations were sought out. By the end of 1991, three more Hush Puppies Uruguay stores were opened, bringing to six the total number of Hush Puppies locations in that country. Essentially no Hush Puppies shoes were exported to Paraguay in 1991 and no changes were planned for 1992. Customs duties on shoes averaged 70% in Paraguay but were being slowly cut under pressure from the General Agreement on Tariffs and Trade (GATT) as well as broader initiatives undertaken in creating the Southern Cone Economic Market. Ricardo believed that as the economy opened up in 1993, Forus would begin some modest exports. In Bolivia, a country of seven million, Forus established a licensing agreement with Global Trading Company of La Paz. Although the agreement had been in place for less than a year, two stores had been opened and Hush Puppies Corners had been set up in two department stores. Ricardo estimated that exports for 1992 would amount to about 15,000 pairs or about $U.S. 525,000. Because of prevailing import tariffs, retail prices in Bolivia were set at a 10% premium over Chilean net prices. Although it was too early for managers at Forus to evaluate the long term effectiveness of Global Trading Company in Bolivia, Forus had an option to buy up to a 50% equity position in the company at a time of its choosing.

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In 1992, the companys efforts in Argentina were focused exclusively on promoting its Brooks line of athletic shoes. Coast Sport Argentina was established in 1991 and acted exclusively as a wholesaler for a variety of independent retail outlets in the country. Coast Sport Chile owned 80% of the new company, with the remaining 20% owned by NORSEG Argentina, which had NORSEG Chile as a majority owner. Brooks shoes were imported directly from factories in the Far East or from Coast Sport inventories in Chile. Ricardo estimated that in 1992 in Argentina the company would sell about 32,500 pairs of Brooks shoes, worth approximately $U.S. 1.0 million.

Recent Developments
After witnessing almost a decade of accelerating growth and profits, Ricardo was reflective. Projections indicated that 1992 would be the best year ever for the company with after tax profits at over 15% of sales and return on equity surpassing 35%. (Financial statements for 1990 and 1991 are reported in Exhibit 6.) With such growth and profitability, it was easy to feel confident. By the summer of 1992, Ricardo was weighing a number of options to recommend to Alfonso and Juan Pablo for consideration. One major thrust under consideration was to move aggressively into the retailing of apparel. Although Costanera had little experience with clothing, apparel seemed to fit well with the companys other retail operations. It was thought that the best way to proceed would be to open a chain of stores combining both Brooks and L.A. Gear athletic shoes with brand sports clothing. While the combination of athletic shoe and clothing stores had proved a major hit in Europe, Japan and North America, it had yet to be effectively pursued in Chile. A combination outlet would have the advantage of allowing the company to move incrementally into apparel while concurrently expanding athletic shoe sales. Costs for retail space in a typical up-scale Santiago shopping mall were estimated at 7% of net sales with leasehold improvements averaging about $U.S. 30,000. Unfortunately, the company did not have a brand under consideration and was wondering how to aggressively proceed. A second option being considered was to open a chain of outdoor clothing stores. The outdoor clothing and accessory market was particularly attractive because it was a segment that appeared to have been neglected in Chile. Through visits to the U.S., all three Swett brothers had become familiar with a variety of fast growing outdoor clothing stores such as Timberland, Eddie Bauer and North-by-Northwest. Market research in Chile indicated that outdoor clothing sales could grow rapidly and Ricardo wondered if he should recommend a major move into this segment. What was uncertain was the extent to which the skills learned in marketing shoes could be transferred to outdoor clothing. A third option for the company was the introduction of a new retailing concept for childrens shoes and apparel. While first Hush Puppies Chile and then Forus had been selling childrens shoes for the past 10 years, the introduction of Hush Puppies for Kids had been a major hit in the marketplace. In July 1992, managers at Hush Puppies Chile were debating whether to extend the Kids line to include brand childrens clothing and accessories. A full line of merchandise would accompany a full move into childrens retailing by
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filling out stores and providing an added draw for consumers. Wolverine had been trying for years to introduce Hush Puppies brand clothes for children in the U.S. but the efforts had not gone well. To better develop a recognizable brand in the U.S., Wolverine had just recently adopted the Hush Puppies for Kids logo which had been developed in Chile. While Ricardo realized the potential for new retail concepts, he was also fully aware that a movement into retailing would have serious consequences for the company. Behind the increasing interest in diversifying the retail base of the company was the recognition that retailing was becoming more specialized. The need for even greater specialization was articulated by Renato Figueroa, General Manager of For-Shops retail operations: As the market becomes more globalized, our next move must be to specialize in our stores. Where we have family stores, we must in the future have mens stores, kids stores, womens stores, and lifestyle stores. Ricardo was also faced with the decision of focusing management efforts on either increasing sales in Chile or on expanding sales in other Latin American countries. Some in the company argued that Costanera could do both at the same time. Others disagreed by highlighting the risk that foreign operations would siphon critical resources away from core Chilean operations. For Ricardo Swett, the critical issue was management.
Our big problem with growth is people. How can the management of the company keep up with such rapid growth? We need good middle managers. . . On average, about 60% of our senior managers have had formal university training in management. When we exclude manufacturing managers, this number climbs to about 80%. Still, we spend a lot of effort training our managers. On average, each of our managers receives about 2 1/2 weeks of training per year. Sometimes I feel that we are moving too slowly. The world is changing so fast that it is increasingly difficult to stay abreast of what is going on internationally. What worries me is that our managers might not be reacting fast enough. There needs to be a daily commitment to learning.

Clearly, Ricardo had much to consider. While any major decision would require the support of both Alfonso and Juan Pablo, Ricardo realized that they would be relying on him for direction. Ricardo seemed to have more questions than answers. How fast should they move and where should they target expansion? Despite enormous success in the past, it was uncertain which direction to turn.

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EXHIBIT 1 Sample Advertisement Placed by Hush Puppies Chile in Major National Magazines

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EXHIBIT 2

Costanera Holding: Organization Chart

Costanera

Agriculture

Elecmetal

Real Estate

Forus S.A.

Top Sport (L.A. Gear)

NORSEG S.A. (Safety Equipment) Chile Spain Argentina

Coast Sport (Brooks) Chile Bolivia Paraguay Uruguay Argentina Peru

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For-Shop (Retail) Chile

Hush Puppies Chile Bolivia Uruguay

EXHIBIT 3 Business Relations with Wolverine World Wide (thousands of U.S. dollars) TOTAL 1987-91 PURCHASES Leather and Raw Material Hush Puppies Finished Shoes Brooks Shoes TOTAL ROYALTIES Puppies Brooks TOTAL $ 6,302 557 3,960 $10,819 1,032 441 $ 1,473 PROJECTED 1992 $2,000 640 1,400 $4,040 500 120 $ 783

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EXHIBIT 4 For-Shop: Retail Sales, 1990-1992 1990 NUMBER OF STORES SALES (pairs in 000s) H.P. Mens H.P. Womens H.P. Childrens Sports Shoes TOTAL SALES (000s $US) Total Shoes Total Accessories TOTAL AVE. $US RETAIL PRICE (pair) AVE. MONTHLY INVENTORY (pairs in 000s) ANNUAL INVENTORY TURNOVER NUMBER OF EMPLOYEES
1

1991 25 188 74 49 41 328 12,163 841 13,004 $37.08 129 2.5 177

19921 26

25 164 69 37 31 289 8,575 519 9,094 $29.67 122 2.4 154

125 61 44 418 17,260 1,226 18,486 $41.29 158 2.7 203

1992 sales are estimates

Note: These figures do not include franchises, department stores or export sales

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EXHIBIT 5 The Chilean Economy: A Brief Overview Political polarization under the left wing government of President Salvador Allende (1970-73) brought the country close to a civil war, and ended in September 1973 with a coup detat led by General Augusto Pinochet. During his 17 year rule, Pinochet turned to the writings of free market advocate and Nobel Prize winning economist Milton Friedman to guide national industrial policy. Immediately after seizing power, marshall law was imposed, the economy was liberalized and foreign corporations were invited to return to Chile. Pinochets 1980 blueprint for political democratization was completed on December 14, 1989 when a national plebescite was held and Patricio Alwin, the Christian Democratic leader of a center-left coalition was elected president. He took office on March 11, 1990. While Augusto Pinochet remained commander of the nations armed forces in mid-1992, the emerging democracy seemed stable and strong to most observers. The success of Chiles free market reforms after a decade of stagflation and debt crisis amazed many observers. Most economists attributed Chiles enviable economic growth to its unrelenting dedication to free markets. By mid-1992, the bulk of the Chilean left was no longer anti-capitalist, and a remarkable degree of consensus existed in the country about the need to maintain a liberal market economy and prudent fiscal policies. The main dividing issues related to a new labor code granting more rights to unions, and the question of what to do about serious human rights violations that occurred under the Pinochet regime. Economic Data for Chile, 1983-1991 GDP ($ billion) Population (million) GDP per head ($000) Inflation (%) Unemployment17.4 Total Debt/GDP (%) 1983 19.8 11.7 1,692 23.1 10.9 91.9 1985 15.6 12.1 1,289 26.4 8.0 130.7 1987 18.9 12.5 1,512 21.5 4.8 109.3 1989 25.4 13.0 1,954 21.4 5.2 68.4 1991 30.0 13.1 2,239 18.7 63.1

Despite its interest in open markets, Chile has shunned involvement in Mercosur or the free trade zone that neighboring Paraguay, Uruguay, Argentina and Brazil hoped to have running by 1994. Confident after nine years of stability and growth, Chile in 1992 was aspiring to become the first Latin American county to join NAFTA. If NAFTA membership were to prove elusive, the government intended to pursue a free trade agreement with Japan, Chiles top export market after the United States.

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EXHIBIT 6 Financial Statements for Forus, S.A. (for the years ended December 31, 1990 and 1991) Income Statements Operating Revenues Operating Costs Gross Margin Administrative and Sales Expenses Operating Results Non Operating Expenses Income Before Tax Income Tax NET INCOME Chilean$/US$ Balance Sheet ASSETS Total Current Assets Total Fixed Assets Less Accumulated Depreciation Investment in Related Companies Plus Other Assets Total Assets 1990 (Ch$) 3,917,656,542 (2,874,204,603) 1,043,451,939 (534,015,090) 509,436,849 (113,686,107) 395,750,742 16,273,224 379,477,518 337.09 1990 (Ch$) 1,678,518,025 2,084,031,742 ( 544,166,086 ) 1,632,891,422 4,851,275,163 1991 (Ch$) 5,092,329,385 (3,507,627,947) 1,584,701,438 (666,112,679) 918,588,759 110,645,279 1,029,234,038 49,547,770 979,686,268 374.09 1991 (Ch$) 2,561,279,678 2,387,101,951 ( 699,091,557 ) 1,966,126,263 6,215,416,335 1,756,973,367 608,837,630 152,427,111 761,264,741 3,697,178,227 6,215,416,335

LIABILITIES AND SHARE HOLDERS EQUITY Total Current Liabilities 1,530,707,772 Long Term Liabilities Bank Debt 377,752,696 Other Accounts Payable 130,702,501 Total Long Term Liabilities 508,455,197 Total Stock Holders Equity 2,812,112,194 Total Liabilities and Equity 4,851,275,163

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