Servus Rubber nearly got squashed trying to beat foreign boot makers at their own game. So it changed the game
THERE WERE AROUND 350 OF THEM, and only one of him. But Tommy Hewitt was ready for battle.
He didn't have to wait for long. By the time he started speaking, there were plenty of angry faces among the employees of Servus Rubber Co. Most of the workers were older than the 35-year-old Hewitt, and some had been making boots since before he was born. Yet here he was, an outsider dressed in khaki pants and leather moccasins, asking them to make concessions so that he and a partner could buy the company.
Drowned out at times by boos and hisses, Hewitt got only halfway through his presentation. "You're just trying to take things away from us," yelled one worker, challenging Hewitt's claim that Servus's parent company had plans to shut it down. Then came a long volley of questions. Why should we give up a week's vacation? What are you going to do with the salary you want to defer? "We can't support our families now," shouted one man. "How can we give all this up?"
Hewitt didn't get a change to answer. "Do you want to work?" yelled the union vice-president. "We have to help them. We don't have a choice. Do you want to be out on the street?"
It was 1982, and the streets of Rock Island, Ill., were just starting to get crowded with people out of work. At International Harvester, Deere, and J. I. Case, production was shrinking. And the smaller manufacturers were losing business as subcontracting work winged overseas. Now, it was Servus's turn.
That night at the Rock Island Moose Club, a local fraternal lodge, the workers approved Hewitt's plans by a decisive vote. "It was the only future we had," says one worker, shrugging. Nobody could have predicted what the new owners had in mind. Maybe Hewitt and Michael Cappy would continue trying to compete at the low end of the market against cheap Korean boots. Or maybe they would even padlock the factory and become a marketing group. In any case, Servus would never be an industry leader again.
Or would it?
A Presidential candidate might well come to Rock Island, a living symbol of America's industrial decline, to highlight his commitment to competitiveness. On a quick tour of Servus Rubber, he might promise to fight for American jobs.
There is no kind of government intervention, though, that could have rescued a company like Servus. A tariff on Korean boots wouldn't have helped. Nor would a more favorable foreign-exchange rate. Servus fell into dire straits because it was poorly managed. Challenged by foreign competitors, the company decided to compete on the Koreans' terms. It lost touch with its market and, worse still, with its own strengths.
Servus first began drifting off course about 10 years ago. Swamped by cheaper imports, the company got winded trying to match the numbers on the Koreans' price tags. It suffered steep losses. "The only question was 'When would we go?" recalls Leon Goold, a Servus employee for 35 years.
Servus had seen much better days. From its 1921 beginnings, Servus had been distinguished by the quality of its boots and the splendor of its annual picnics. The all-day outings were glorious family affairs -- especially packed during the 1940s, when the company employed 1,100 workers -- complete with popcorn and ice cream. From Rock Island, which is about midway between Des Moines and Chicago, people had to take three buses to get to the state park in Moline, Ill. One family owned the business back then, and many families worked there: fathers brought their sons into the company to work side by side on the assembly line.
Foreign competition became a factor in the late '60s, when cheap sneakers from the Far East overran the market. Servus, which at one time was producing 25,000 tennis sneakers a day, closed its sneaker operations and successfully crept into smaller niches. It produced, for instance, a plastic galosh called the Hustler, which was popular among farmers, construction workers, and electricians. And it made special overshoes for military and industrial workers.
In 1972, the $25-million business was sold to a division of Chromalloy American Corp. Chromalloy installed new chiefs at Servus and left the strategizing to them. As the Koreans challenged more of its markets, Servus panicked. The new executives forgot what Servus did best -- produce quality boots -- and instead initiated a decadelong process of competing with the Koreans on price. "I don't think they even understood the reasons for Servus's success," says one observer.
To keep prices low, the company began stripping down its products. It bought rubber, zippers, buckles, and cloth from the cheapest suppliers it could find. What were once quality boots were fast becoming low-quality "me too" products. For example, the lining in one of its most popular farming boots, the Northerner, was changed to a more loosely netted fabric. That saved about $60,000 a year. At the same time, companywide returns rose to about 10%, undoubtedly because of such problems as the netting, which tore easily. Those returns were adding substantially to shipping and labor costs; never mind the disgusted customers who left for good.
Servus stopped investing in its business. "We didn't deal with them, unless they took things away from us," says Jack Miller, the industrial-relations manager who in 1971 started as a night "cracker man" in the mill room, grinding up used rubber. Even though employees were fainting on the job, management refused to install an adequate number of fans. A minor disagreement over health insurance turned into a seven-week union strike and a one-week wildcat strike in 1978.
Equipment was also neglected. One example was the Banbury mixer, a giant machine that stirs rubber like an electric eggbeater. Servus decided not to spend $60,000 to keep an extra reconditioned body at hand. When one broke down, so did the factory.
By 1981, Servus was losing more than $1 million on $14 million in sales -- and this after starting a decade earlier with a profitable company twice as big. No wonder; customers were fed up. "I would have bet you $1,000 that I would never buy another Servus boot," says Mary Grilliot, vice-president of Morning Pride Manufacturing Inc., which makes and distributes protective clothing for fire fighters. Customers in Servus's other markets -- industrial, farming, and sporting boots -- felt the same way.
A major consulting firm, called in to diagnose the company's ailment, looked at the production costs of Servus and the Koreans. It issued a half-inch-thick report. This company is terminally ill, the consultants said. Might as well shut it down. Soon, unless a buyer appeared, there would be an additional 350 unemployed people wandering the streets of Rock Island.
Michael Cappy spent about six years wandering through the corridors of corporate America -- such big names as Peat, Marwick, Mitchell; Booz, Allen & Hamilton; and General Electric. At 33, though, what he really wanted was to run his own manufacturing business. Tommy Hewitt, whom he had known at GE, had heard about Servus through a consultant.
So Cappy traveled to Rock Island to have a look. He met with workers and was impressed by their commitment. "They had a lot of pride," he recalls. "They talked about the history of the company, the history of the company, and the history of the company." They also voiced concerns about the future of the company. Chromalloy had recently liquidated a boot company it owned in Chicopee, Mass. Is the same fate in store for us? they wanted to know. Can you get us out from under them?
Maybe, Cappy thought. Back in Louisville, he and Hewitt buried themselves in industry data. Little by little, Cappy's enthusiasm grew. Here was a company that had been sorely neglected, its brands milked and run into the ground. Yet the brand names still meant something to customers. Take the Northerner line of boots, for instance. Despite being stripped of most of its value, the name still attracted customers. "That sucker deserved to be dead with what they did to it," says Cappy. "Yet it demonstrated uncanny resilience."
Servus's problem, as Cappy eventually diagnosed it, could be summed up in a word: positioning. It was competing in the wrong end of the market; it had blindly followed its Korean competitors into a market that played to the Koreans' greatest advantage, low labor costs. Servus had turned its back on its own strengths. "If the basis on which Servus competed in the marketplace was price, and there's a lot of labor content in what it makes, it doesn't take a genius to figure out that the business is going to die," Cappy says. "We found Servus playing under rules by which it could not win."
Would it be possible, he wondered, to boost the company's margins by finding small niches where customers would buy quality? Everything he read convinced him that it would be. Well, almost everything. Just as Cappy and Hewitt were getting close to making a deal, the consulting group's report landed with a thud across Cappy's desk. "It gave us indigestion," he recalls.
Not a chronic case, though. The report didn't change Cappy's analysis of Servus's basic strengths. It still had a solid name, some promising markets, and strong internal spirit. "Buried in every $20-million dog," Cappy says, "is a $10-million gem." And, perhaps best of all, Cappy could buy this dog at a substantial discount. CIT Commercial Finance, now a division of the New York City-based Manufacturers Hanover Corp., agreed to finance the $5.7-million buyout. The United Rubber Workers and salaried employees made some concessions that eased the bleeding. In return, Cappy gave workers about 20% of the business through an employee stock ownership plan. And he gave the union president a seat on the board of directors.
The first challenge was fixing the company's production and quality problems. All the marketing genius in the world wouldn't help if Servus's boots were leaking. To boost quality, Cappy brought in consultant Behrooz Jalayer, who had recently fled Iran (see box, "The Consultant Wore Army Boots," page 120).
But who would run the company? For the first few months, Cappy had left most of the existing management in place, including the president that Chromalloy had installed. Jalayer contended that the president had to go, in large part because he had a terrible relationship with employees. When Jalayer started "quality sessions" between managers and workers every morning, the president hesitated to sit at the same table as the union chief. On the other hand, Hewitt argued that millions of dollars would follow the president out the door. "The more careful you want to be," Jalayer countered, "the more you are dragging your feet on the recovery of this company."
Cappy finally fired the president. The day it was announced, Servus workers went wild. Somebody took the keys to the president's company car, threw them on a table, and shouted, "Anybody want to drive the president's car?" Another employee knocked down the nameplate on his desk. Says Leon Goold, who once got into a scuffle with the president in the men's room: "There wasn't an unhappy face in the building."
Soon there was a new face in the corner office. Marc Caparrelli, the new Servus president, had spent 13 years at Campbell Soup Co., 6 of them in marketing-related jobs. He and Cappy had been buddies since high school. Jalayer stayed on as a consultant, later rising to vice-president of operations and, eventually, president. All three of them own stock in Norcross Cos., the holding company that includes Servus and some 10 other small businesses. Cappy owns a controlling interest in Norcross, which has revenues of nearly $135 million.
What Servus needed was "to take a consumer-marketing approach to the business," Caparrelli says. Every product is, in some ways, a consumer product. The safety director who buys a fire boot is similar in many ways to the shopper deciding on a dish-washing liquid. So, Caparrelli argued, we have to ask the same questions that a consumer marketer would ask: how can we differentiate ourselves? People purchase products that represent the best value, a mix of quality and price. How do we make ourselves a better value?
The sales staff thought that it had the answer: slash prices even more to help them open new accounts. Cappy disagreed: a price decrease, he felt, would have a negative long-term effect. Customers might try a product once, but they wouldn't stick with something inferior.
So Cappy moved ahead, positioning the company as a quality leader. Along with Hewitt, who left the company in mid-1983, he visited potential customers and assured them that Servus was returning to the topnotch quality they remembered. They played on their fond memories of the company. You guys are still around? the potential customers would respond, wide-eyed. Why, heck, I haven't seen a Servus sales rep in, oh, it must be five years.
And the salespeople brought something new with them: cut-up samples of Servus boots. We have boots, they began, with six-gauge felt lining, a high abrasion index, and total imperviousness to fatty acids. Waterproof and seamless too, with rust-resistant buckles. Never mind that other boots have some of these characteristics as well; they had never been described in such detail. "Part of what we did," says Cappy, "was to be the first to state the obvious."
The company got a surprisingly good reception. "People remembered Servus as being a good, solid company," notes Caparrelli. "Brand images die hard." If those memories weren't enough to sway them, Servus had other means. Sometimes during a visit to a potential customer, for instance, Jalayer might talk about his flight to the United States from Iran. "I get a lot of mileage out of my life story," he says. But more often he would talk about Servus: a 60-year-old company on its last legs, 350 people just barely getting by on some $6 an hour. We are trying to save these jobs, Jalayer appealed. And then there were the practical advantages of buying from Servus instead of the Koreans: you didn't have to tie up your money for nine months or take the product as is. And the new owners offered delivery within 72 hours.
Later, as Servus grew more surefooted, it used hardball tactics. One Servus salesman took a foreign-made boot to an independent lab. The test results showed that its steel toe crushed under the weight of 75 pounds, violating the federal standard. That became part of the usual pitch to customers. Servus also had tests done on a foreign fire boot. Salesmen took the less-than-impressive results to state purchasing agents and to distributors. If, heaven forbid, there's an accident, Jalayer would warn distributors, these inferior boots could land you knee-deep in liability problems. "We put a push on the liability, and that there are a lot of weirdos in this country who will sue over anything," says sales manager Julie Dolter.
By mid-1983, Servus had picked up some major accounts. A few months later, it raised prices about 3%. The company, Cappy felt, had demonstrated its commitment to quality. "You want to increase the price to be consistent with the positioning," says Cappy. "Nothing confuses a consumer more than to get something that looks like it could cost more, and doesn't." It was also consistent with the new slogan its ad agency had suggested: Servus Sets the Standard.
Servus now had a foothold. But only through innovation could the company's sales grow in mature markets.
To make that happen, Caparrelli took a cue from his former employer, Campbell Soup: wherever possible, create a flagship product. At Servus, these would be leadingedge boots that stood at the top of each line. "They create an umbrella under which the enhanced image rubs off on the other products," says Cappy, who had seen the same strategy work at General Electric. Not all consumers would be able to afford the flagship product. But they would assume that Servus brought the same know-how to its other lines of boots.
To find ripe niches, they did what any good marketers do: they got in touch with their customers. They scrutinized every possible market segment and sub-segment. The sales staff played a key role. "New-product ideas don't come from people in the labs," Cappy says.
Cappy assembled the entire sales force in Winter Park, Colo. The first day, he listened to complaints about service, delivery, and pricing. Then he talked about his plans. "Everybody was skeptical," says Cappy. "But they can detect the difference between sincerity and BS." We've never been asked about the direction of the company, the salespeople figured, so what do we have to lose? Some came up with new products, others had ideas about material, and some contributed packaging suggestions.
Potential customers were another good source of ideas. Jalayer went to trade shows and talked with boot distributors. What niche are you after? he would ask. How do you appeal to your customers? What new products would you like to see? They were mining for sizable markets where price wasn't the decision factor.
The fire-boot market was one. Customers would happily pay for quality. And it was easy to find the nation's fire fighters. They read industry magazines and attend trade shows. Just a mildly improved fire boot, backed by targeted marketing, could create sparks. "Fire boots had gotten stagnant," says Mary Grilliot, the boot distributor. "And this is a market that will pay for an improvement, since lives are at stake." And Grilliot, who had sworn off Servus forever, was impressed. At a trade show, Jalayer dragged her to the Servus booth. There she saw a fire boot with more supple rubber, melded design lines, a beefed-up sole, and a better fit and feel. Could this be the same Servus Rubber?
It wasn't. But if that didn't convince her, the company's next step would. Jalayer had started thinking about how to differentiate Servus's fire boot. One night at a trade show, a customer asked him, Why isn't the lining up to the same technological level as the rest of the boot? That got Jalayer thinking, Why not create a fire boot with a flame-retardant lining? Not just any flame-retardant lining, mind you, a Kevlar-Nomex lining. Sounds impressive, doesn't it? And that's just the point. No matter that the fire is outside the boot. Fire chiefs and safety directors appreciate technological improvements. Servus created the boot, then doubled its advertising budget for such magazines as Fire Chief and Fire House, the most efficient way of reaching the fire fighters. "We had so many calls and inquiries that it forced the distributors to start carrying this boot," says Dolter.
Servus worked hard to convince users to shell out the extra 15%. Jalayer sent free samples of the boots, which retail for around $80, to a number of fire chiefs to use and evaluate. The Chicago Fire Department, for example, was using Korean fire boots. When a fire fighter was injured, Jalayer used the opportunity to visit the fire chief and explain Servus's edge. He not only won him over, but the chief also agreed to recommend the Firebreaker line to suburban fire departments. Before a major trade show in 1986, Jalayer sent letters to 23,000 fire chiefs urging them to stop by and see the boot. About 4,000 visited Servus's booth during the first three days.
This year, Servus expects to sell 30% more fire boots than it did last year. Since 1982, sales of fire boots have more than doubled. And among Servus's major customers is Mary Grilliot, who returned, she says, because "Servus was willing to innovate."
And not only in fire boots. Servus's line of dielectrics was very limited when Cappy bought the company. Some competitors were selling boots that could withstand 14,000 volts of electricity. Give us something to sell against that to the utilities, the sales staff urged Caparrelli. Sure, he said, but why would a customer switch to ours? Again, how can we differentiate ourselves? His solution: a boot that withstands 20,000 volts. Since 1983, sales have climbed steadily to about 10,000 pairs a year. "It's a nice margin of protection and a great selling point," says David Forsthoffer, president of Shoes & Gloves Inc., a safety-equipment distributor.
Servus added a few extra touches, as well. Based on an idea that Caparrelli got from a customer in the utility industry, Servus added a two-and-a-half-inch heel to the boots, enabling workers to climb poles more easily. The dielectric boot was in another market where quality was more important than price, and Servus could reach it through direct mail.
In some markets, Servus created a flagship boot through sheer positioning, rather than technological innovation. The three-eyelet Northerner boot, for instance, hasn't changed much in the 30 years Servus has been selling it to farmers. But the label looked slapped on, and the box featured a drawing that looked too much like pigs frolicking. Farmers are not only a price-sensitive market, but expensive to reach -- and they don't like their pigs made fun of. So Caparrelli upgraded the packaging, drawing attention to the boot's benefits, and added color to a new package illustration, which now looks like a polar bear. He used point-of-purchase hangtags, with instructions for care and a two-year warranty. Inside each boot, he added an inspection tag. "It creates an image that 'these guys are really proud of this boot," says Cappy. "You behave like it is a superior product."
Making a superior product has its rewards. A year after Cappy took over, Servus cleared about $150,000 after having lost more than $1 million the year before. Sales reached nearly $20 million in 1986, with "substantial pretax earnings," according to the company. Employment has swelled from 350 to 500 since 1982.
How easy it is to drift back into bad habits. Servus had learned a lesson from its pursuit of the Koreans and had also rediscovered its own strengths -- or had it?
The innovation that got the company moving again has slowed. "We're somewhat frustrated with Servus's lack of ability to develop new products," Cappy admits. Some attempts seem halfhearted. Last year, Jalayer wanted to extend the Northerner brand name into coveralls. Cappy says he agreed because Jalayer "got all hot and bothered about it." Servus sold only about 7,000 pairs in 1986, and Jalayer predicts it will sell 10,000 this year. He even talks about acquiring a coverall maker. Cappy has other ideas. "We ought to be out of that business," he snaps. "It's not even a business. It's a distraction."
Worst of all, Servus tested the low end of the market once again. In 1985, Jalayer noticed that Servus's sales of Tomahawk, an overshoe for farmers and construction workers, were only a fraction of what they had been six years before. The Korean boot makers, who were selling similar overshoes at around half the price, offered to become Servus's suppliers.
But after visiting Korea, Jalayer strolled into Caparrelli's office and announced his intention to revive Tomahawk. Revive Tomahawk? Don't be silly, replied Caparrelli. We can't compete on price. But maybe we could import the boots from the Koreans and market them here. No, that would damage the integrity of our own lines, countered Jalayer. What are you going to say to the union workers who don't get a chance to beat the Koreans? Then Jalayer presented his own plan. Drop the price by about 20%, he said, and make up the margin in volume by offering it only to customers who buy at least 150 pairs. And use incremental price increases after that. Well, they finally agreed, it would be a great way to absorb overhead and use excess capacity.
Jalayer returned to Rock Island and plastered stickers of angry bald eagles all over the factory. "We are fighting back," they said, referring to the Korean footwear. The market responded to the drastic price cuts, and sales shot up 500% between 1985 and 1986. Suddenly, the Tomahawk line was becoming the company's most visible product. The local newspapers were even writing about it.
Tomahawk developed into a marketing blunder, though. The "fighting back" theme was in danger of becoming Servus's image in the marketplace. It wasn't at all consistent with the slogan Servus Sets the Standard. "The last thing I want to tell our customers is that we're fighting back," says Cappy. "Implicit in it is an admission that we got our asses kicked." Cappy was also concerned that the low-margin items of the Tomahawk line might eclipse the company's more profitable lines of boots.
If that happened, Servus could find itself back where it started. "You can be a genius in turnarounds, but if you don't follow up, it will return to worse than it was before," says Jalayer. That would be more bad news for Rock Island, where mothballed plants have become too common a sight. Since Cappy took over Servus, about 20,000 workers in the metropolitan area have lost their jobs at other companies.
All because of foreign competition, or so they think. Maybe they ought to look at Servus and think again.