UNIVERSITY OF THE PHILIPPINES
In the Visayas
Gorordo Ave., Lahug, Cebu City
In partial fulfillment
of the course requirements of
L.A. Gear, Inc.
Prof. Gretchen Chaves
Homecillo, Marie Grace
Mesa, Maria La Arnie
February 9, 2010
I. SITUATIONAL ANALYSIS
The athletic shoe market comprised about 50% of the US general footwear market. The domestic retail shoe market was expected to continue to grow at a rate of 5.5 percent until the end of 2000.
In the US, the two largest athletic shoe makers were Nike and Reebok with a combed 50% share of the market. Majority of their products are manufactured in countries outside the US such as the Asian, European, and South American countries. This caused the high mark-ups to the retailers and consumers which were nearly 100%.
The footwear industry was seasonal rather than cyclical. Fluctuations in sales and profitability were attributed to changes in advertising expenditures, price, product quality and overall market trends.
Barriers to entry such as dependence on heavy advertising, brand awareness and intensive R&D made entry to the footwear industry difficult. Companies spent large amounts to do advertising which were their means for promoting new styles and creating brand awareness. This made it difficult for the smaller companies which do not have enough revenues to produce effective marketing campaigns. Brand awareness was also a barrier to entry since consumers usually purchase based on “how they perceived the brand to perform or on its fashion characteristics”. Research and development demanded excessive capital from a company. Large budgets were allocated on R&D because this was how the company determines the latest trends of the market and the possible products that it could develop. Barriers to entry in competitive discount athletic footwear market were less formidable. Mass producers usually carve out a niche “through brands they licensed or created on their own.”
Many footwear companies were starting to expand their operations overseas because the US footwear industry was seen as a maturing industry. The international market offered a bigger consumer base especially that more consumers were starting to get interested in the US sports like basketball.
LA Gear was founded by Robert Greenberg which initially promoted the Southern Californian lifestyle. Its early success was due to its innovative styling and ability to respond to the market quickly. As the company grew, it opted for initial public offering and used the proceeds to fund its growing working capital requirements and to finance advertising and promotional campaigns. Marketing campaigns often featured scantily clad models and attractively styled shoes designed primarily for women. The company was also publicly listed and stocks rose to more than 178 percent. However, the stock price started to decline and investors were losing confidence on the company. It started to experience financial difficulties with the failure of its Michael Jackson shoes. Net sales and market share dropped and net losses were incurred as a result. To enhance its credit rating, it sold 30 percent stake to Trefoil Capital Investors L.P for $100 million. Following the investment, LA Gear adopted a retrenchment or turnaround strategy to restructure the company's operations.
Under the turnaround strategy, the top management was replaced (including Greenberg) and the new board of directors was made up with highly experienced members. The strategy also introduced a new advertising campaign that was built around the theme Get in Gear which changed the focus from promoting a fashionable shoe...