Florsheim Shoe Group Inc.

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Florsheim Shoe Group Inc.

200 North LaSalle Street
Chicago, Illinois 60601-1014
U.S.A.
Telephone: (312) 458-2500
Fax: (312) 458-7470
Web site: http://www.florsheim.com

Public Company
Incorporated: 1892 as Florsheim & Company
Employees: 2,037
Sales: $244.8 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: FLSC
NAIC: 3143 Men’s Footwear, Except Athletic

Florsheim Shoe Group Inc. manufactures and sells one of the world’s best-known brands of men’s dress shoes. These brands—Florsheim Imperial, FLS, @ease, and Florsheim Com-fortech—were complemented by the debut of a line of Florsheim golf shoes. In 1997, Florsheim secured several lucrative licensing agreements, and since then has produced John Deere work boots (for Deere & Co.) and Joseph Abboud dress shoes (for upscale designer Joseph Abboud). In addition to operating 350 company-operated stores, Florsheim sells it shoes at over 6,000 department and specialty stores. Two investment groups run by Leon Black own over 67 percent of the company.

Founding of a Family Business

The company was launched under the name Florsheim & Co. in 1892. Milton Florsheim, the company’s founder, sought to produce high quality men’s dress shoes at a moderate price, and he opened his first factory in Chicago. The first Florsheim shoes were made by Milton and his father, Sigmund Florsheim. Florsheim’s distribution system was established in the company’s infancy. The company provided support for entrepreneurs who wished to set up stores that would sell Florsheim shoes retail. In this way, Florsheim shoes began to go on sale in small towns throughout the United States.

Florsheim expanded its distribution system in the early part of the 20th century. Wholesale distribution was set up in several metropolitan areas. Company-owned retail outlets were also established in several cities. These stores were large enough to display and sell the entire line of Florsheim shoes and became the company’s flagship operations. In 1929, the company began manufacturing women’s shoes. By 1930, there were five Florsheim factories in Chicago. The shoes were sold through 71 retail outlets, either wholly or partly owned by the company, as well as through nearly 9,000 dealers not directly affiliated with the manufacturer. The company had 2,500 employees by this time.

After approaching $3 million in net income in 1929, Florsheim, like most companies dependent on retail sales, was hurt badly by the onset of the Great Depression. By 1931, the company’s net income had shrunk to $717,000. As the Depression eased up somewhat in the second half of the 1930s, net income hovered around the $1 million mark, and sales began slowly to climb once again, reaching $9.4 million in 1940.

Despite its size, Florsheim was still very much a family operation in the 1930s. Aside from Milton Florsheim, the company’s two highest ranking officers in 1930 were his sons, Irving and Harold, who had joined the business in 1914 and 1920, respectively, after graduating from Cornell University. Two other Florsheims, Louis and Felix, also sat on the board of directors. In addition to its business successes, the Florsheim family was also prominent in the art world, both as patrons and artists. Helen Florsheim, Irving’s wife, had a distinguished career as a sculptor. In 1936, Milton Florsheim died and was replaced as head of Florsheim Shoe by Irving. Sales at Florsheim stalled once again in the mid-1940s, hovering around $17 million. In 1946, Irving Florsheim ascended to the position of chairperson, leaving the company’s presidency to his brother Harold.

Acquisition by Interco

By 1949, Florsheim’s sales were $25.3 million. At that time, there were 82 wholly or partly owned Florsheim retail outlets, and another 4,500 unaffiliated stores that sold Florsheim shoes. The bulk of Florsheim’s manufacturing was still taking place at the company’s Chicago plants, principally the original facility near Chicago’s Loop and two others on the northwest side of the city. In 1953, Florsheim was purchased by International Shoe Company (now called Interco), the largest shoe manufacturer in the world, for about $21 million. Three years later, Florsheim’s status was changed from that of a subsidiary to a division of Interco. Florsheim was still run autonomously, however, with Harold Florsheim in charge of the division.

Florsheim quickly became International’s most important unit. In fact, in its first decade as part of International, Florsheim thrived, increasing its sales nearly every year, while the parent company struggled for the most part. Between 1953 and 1963, Florsheim’s sales doubled. By the end of that period, Florsheim was contributing an impressive 58 percent of International’s earnings, while generating only about a quarter of its sales. Florsheim was the overwhelming leader among producers of better shoes for men (with prices of at least $20 per pair), controlling over 70 percent of that market. The company’s success had much to do with Harold Florsheim’s marketing innovations, as well as with the company’s wise refusal to dilute its line with cheaper shoes, which could increase sales but would also trim its profit ratios.

A Period of Expansion

Florsheim’s operations were again expanded in the mid-1960s. Facilities at Cape Girardeau, Missouri, were enlarged, and, in 1966, 39 new company-owned retail outlets were added, bringing the total number of stores to 238, while the number of outside dealers selling Florsheim shoes reached 5,000. Furthermore, a new Florsheim plant was opened in Anna, Illinois, and soon thereafter one of that facility’s units was converted for the additional production of women’s shoes, which were sold through Interco’s Thayer-McNeil chain of retail stores. Harold Florsheim became company chairperson in 1966. He held this position until his retirement three years later, and remained active in the company for several years before his death in 1987.

In 1971, two new Florsheim manufacturing facilities were launched, bringing the company’s total to 14. Retail stores run by the company sold about 25 percent of the shoes produced in these plants. By the end of that year, there were 546 Florsheim outlets, and, of these, 75 were Thayer-McNeil Shoe Salons, where Florsheim’s women’s line was sold. The following year, 36 more stores were added, including seven Thayer-McNeils. However, later in the 1970s, Florsheim began to phase out its production of women’s shoes. Although the company continued to operate its Thayer-McNeil stores, wholesale women’s operations were cut out completely, and all outside retail accounts for women’s shoes were discontinued.

Developments in the 1980s

During this time, an influx of imported shoes began to cripple the U.S. shoe industry. By 1978, the number of American workers in the industry was cut in half to 30,000. Furthermore, between 1980 and 1985, the share of imported men’s shoes sold in the United States rose from 44 to 70 percent. As a response to this trend, Florsheim shifted more of its production to foreign countries, where labor was considerably less expensive. About 200 people were put out of work in 1986, when Florsheim closed its Poplar Bluff, Missouri, factory, a plant that had been in operation for 40 years. Despite this industrywide downturn, Florsheim reintroduced women’s shoes to its product line in 1986.

In 1985, Ronald Mueller took over as head of Florsheim. Mueller had worked for the company since 1951, when, at age 15, he was employed as an assistant window dresser. Under Mueller, Florsheim began to experiment with an electronic retailing system called the Florsheim Express Shop. The Express Shop was an interactive computerized system allowing stores to order shoes through a terminal connected to the warehouse at the company’s Chicago headquarters, which maintained an inventory of 1.5 million pairs of shoes. The system allowed the customer to view the shoes on a video monitor, and to select any style or size in the 250-style Florsheim line. The buyer then received the shoes via UPS within a week. The test placements of the Express Shop were a clear-cut success. By mid-1987, the terminals were in place at 200 stores.

Company Perspectives:

Over the years, Florsheim innovation has continued, and the partnership has flourished. Committing considerable resources to research and development, the company has produced a continuous flow of product and distribution breakthroughs. These include significant new footwear design and manufacturing processes, as well as the pioneering use of new systems to make the selling of our shoes much more efficient.

Using advanced electronic technology, we’ve recently created the unique “Florsheim Express Shop” which allows our retail partners to place the entire Florsheim stock line at their customer’s fingertips.

Through strong ideas like this, we will continue to forge even closer partnerships with our loyal dealers. In addition, we will continue to deepen our understanding of our customers’ lifestyles and needs. Our ongoing research into improved comfort and fit will expand. Our unparalleled selection of styles and sizes will grow. And our commitment to quality will never falter. Because even with all our success, we have never, and will never, change the fundamentals upon which Milton Florsheim established his company.

By the beginning of 1988, 336 Florsheim Express Shops were in operation in 16 states, and the company set a goal of maintaining a total of 2,000 Express Shops. Stores with the terminals installed generally showed increases of 15 to 33 percent in sales. During that year, Interco consolidated its International Shoe Company division into Florsheim, moving its operations into Florsheim’s Chicago headquarters. Toward the end of the 1980s, there were actually fewer Florsheim stores, about 250 total, but these stores garnered more sales. This was partly due to a broadening of the Florsheim line to include casual and athletic shoes for the first time in the company’s history, including the Florsheim Comfortech line, which incorporated elements of athletic and walking shoes into a dress shoe design. Many stores that had to supplement their inventories with lower-priced casual shoes were now able to carry stock composed entirely of Florsheim products. In 1989, Florsheim stores that carried the company’s comfort shoe line showed a ten percent increase in sales over the stores that did not.

Meanwhile, Florsheim continued to cut its production costs by moving more of its manufacturing overseas. Between 1986 and 1989, the portion of the company’s shoes made in the United States shrank from 80 to less than 50 percent. In 1988 and 1989, nine Florsheim and International Shoe Co. factories in the United States were shut down, leaving only four domestic facilities in operation, all located in Missouri and southern Illinois. In 1990, the company began developing a franchising program, in which smaller stores were opened under franchise agreements in secondary markets (initially Council Bluffs, Iowa, and Clarksville, Tennessee), while the company continued to operate its own stores in the major market areas. Florsheim also began to withdraw from its leased shoe department arrangements in other stores due to their unimpressive sales volume.

Around this time, testing was begun on in-store sales at some well established chains, particularly Kuppenheimer’s discount men’s clothing stores and Sears, Roebuck & Co. outlets. The Sears test was a huge success, and in 1990, the company announced that Florsheim footwear boutiques would be opened at 100 Sears locations, replacing the regular men’s shoe departments of stores in Chicago, Detroit, Milwaukee, southern California, New Jersey, New York, and Connecticut. The boutiques would include electronic Express Shop kiosks, which by this time numbered over 500 nationwide.

The 1990s

In 1991, Interco filed for Chapter 11 bankruptcy. Interco had been starved for cash since fighting off a 1988 takeover attempt by the Rales brothers through their private investment firm, City Capital Associates. That battle saddled Interco with a debt of $1.9 billion, which it sought to reduce by selling off or liquidating most of its holdings. Florsheim was one of the few parts of Interco left intact. In spite of Interco’s problems, Florsheim remained active in the early 1990s. Two new shoe styles were introduced in 1991. One of them, the Bantam Walking Shoe, was an attempt to tap into the popular walking shoe market that had long been dominated by such brands as Rockport and Reebok. The Florsheim Comfortech Imperial was a new spin on Florsheim’s traditional top-of-the-line Imperial, adding its patented Flor-Flex cushioning and heel padding.

A joint venture was also launched in 1991 with a Mexican investor to sell Florsheim shoes in Mexico. Although this project was reasonably successful, it too was sold off the following year by the cash-poor parent company. Florsheim made another international move in 1991, establishing a wholly owned subsidiary in Italy, the company’s most important European market. That year, the company focused on sales abroad, and was able to increase its exports by 35 percent. Domestically, the alliance with Sears continued to pay off handsomely. A presence in such a widespread chain helped Florsheim increase its market share significantly. The arrangement also helped Sears, which benefited from the presence of products with a reputation for high quality in its stores.

Although dress shoes remained Florsheim’s principal product in the early 1990s, an overall shrinkage of the U.S. market for dress shoes prompted the company to focus more on casual footwear. Florsheim courted younger buyers in its attempt to beef up sales, unveiling a new, more modern, brass plate logo to replace its longstanding shield logo. Furthermore, the company hired popular sports commentator John Madden to endorse Florsheim shoes in media spots, a move which resulted in increased sales for the Comfortech line. The share of Florsheim’s sales contributed by Comfortech (which sold an estimated one million pairs) grew from less than five percent to 23 percent in the four-year period ending in 1992.

Interco emerged from bankruptcy in 1992. Leo Black’s Apollo Investment Fund, which had advised the company during its financial reorganization, gained a majority stake in Interco. In 1994 Interco, which sought to focus on its furniture operations, spun off its two successful shoe divisions—Florsheim and Converse—into publicly held companies. Mueller was slated to head Florsheim.

The young company concentrated on boosting its sales. Since dress shoes continued to lose ground to casual and dress-casual shoes in the competitive footwear market, Florsheim made it a top priority to expand its product line beyond its standard wing tips. “The new design reflects our expanded product line,” Mueller told Retail Store Image. Gone were the dark stores that resembled exclusive men’s clubs more than shoe shops. Instead Florsheim brightened up its outlets and dressed its salespeople in hipper, more casual outfits.

Key Dates:

1892:: Milton Florsheim founds Florsheim & Co.
1936:: Irving Florsheim succeeds Milton at the helm of the company.
1953:: Florsheim is acquired by International Shoe Company (now InterCo).
1966:: Harold Florsheim is named chairman of the company.
1987:: Ronald Mueller heads the company.
1990:: Florsheim boutiques open in Sears stores.
1991:: InterCo files for bankruptcy.
1994:: InterCo spins off Florsheim into a separate public company.
1995:: Mueller is replaced by Charles Campbell.
1996:: Company name is changed to Florsheim Group Inc.

Florsheim’s bold tactics to broaden its customer base grew more aggressive after Mueller retired in 1995 and was replaced as chairman and CEO by Charles Campbell. “We need to diversify product,” Campbell declared in an interview with Dow Jones Investor Network shortly after taking the company’s helm. He noted, “Florsheim has got the image of ‘my father is Florsheim.’ My father’s dress shoe. If you look in our stores, we’re somewhat intimidating towards a younger consumer.” After changing the company’s name in 1996 to the Florsheim Group Inc., Campbell launched a bevy of sub-brands in 1996 and 1997 that were designed to target men of different ages and income levels than the 48-year old businessman who typically bought Florsheim. The @ease brand, a casual shoe priced below $50 and aimed at younger consumers, debuted, as did FLS, a dress-casual offering, and Florsheim Imperial, a less expensive dress shoe. Florsheim also introduced Frogs, a line of golf shoes that targeted its original older and wealthier customers. Such sub-branding protected Florsheim from diluting its highly respected core brand with its new additions. The company’s efforts proved effective. In 1996 Florsheim reported a profit of about $2 million, a substantial improvement over its net loss of $4.8 million in 1995.

In a further bid to broaden its appeal, Florsheim finalized licensing deals in 1996, and in 1997 released its John Deere work boots and Joseph Abboud dress shoes. In 1998, the company opened a new chain of stores called @ease that catered to men from 20 to 35 to distance itself from its stodgier connotations. To increase traffic in both its Florsheim and @ease retail outlets, the company began offering rivals’ shoes, including Timberland and Doc Martens.

Apart from the launching of its @ease stores, Florsheim deemphasized its retail ventures. The company closed 15 of its 92 factory outlet stores and 20 of its Florsheim stores in 1998. At the same time, Florsheim strove to build its wholesale operations. After forging a relationship with J.C. Penney in 1998, Florsheim installed its kiosks in over 400 Penney branches. The company also focused on bolstering international sales.

Turbulent times were ahead, however. Sales for 1998 disappointed investors, and the bankruptcy of two of Florsheim’s biggest customers, Chernin’s Shoe Corp. and the Shoe Corporation of America, eroded Florsheim’s 1999 profits. In May 1999, a former assistant to Campbell sued the company for Campbell’s alleged sexual misconduct. After the case was settled, Florsheim continued to focus on increasing its presence in the non-athletic shoe market.

Principal Competitors

Bally Management Ltd.; Berkshire Hathaway Inc.; Brown Shoe Company Inc.; Kenneth Cole Productions, Inc.; Nike, Inc.; Phillips-Van Heusen Corporation; Reebok International Ltd.; The Timberland Company; Wolverine World Wide, Inc.