It took 20 years for Margot Fraser to turn Birkenstock sandals from hippie affectations into industry leaders. Now she's discovered, as every niche exploiter eventually does, that nothing breeds competition like success. Can her company survive the attack?
In the beginning Birkenstock shoes were the brogan kin to the ugly duckling -- paddle-shaped Jesus sandals perceived as so pathetically homely that their main market was health-food-store owners. They'd wear them behind makeshift counters, feet propped up on bulk bins of wheat bran and organically grown nuts. The sandals were plain, but they were comfortable, and there was nothing else like them on the market.
Margot Fraser of Santa Cruz, Calif., had chanced upon Birkenstocks in 1966 while visiting her native Germany. The sandals were a new product of Birkenstock Orthopadie GmbH, in Bad Honnef. Then 30-year-old Karl Birkenstock had taken over his family's 192-year-old business and was introducing sandals that incorporated the same orthopedic elements that Birkenstock used in its insoles. Fraser, then 36, bought a pair, wore them back to the States, swore that their sand-print-shaped footbed worked wonders on her cramped toes, and ended up buying sandals for her skeptical but interested friends.
Soon she was ordering 6 and 12 pairs at a time, loading up her suitcase with sandals and flattened boxes, and trekking to the health fairs that were sprouting up with the genesis of the whole-earth movement. "Those shows," she says, "were the way I got going." Health-food stores and hole-in-the-wall retailers began carrying the sandals, and eventually she had enough of a business to become, on a handshake, the exclusive U.S. distributor of Birkenstocks. She and a friend, Mary Jones, kept cash flowing by offering 5% discounts to retailers who paid their bills within 10 days.
The sandals created their own puny niche as the rejects of the shoe industry: not athletic shoes, not fashion sandals, and certainly not office attire, they were, for the most part, ignored. Birkenstocks' debut in the national press wasn't until 1976, when a women's magazine named the sandals a "fashion don't." But for enclaves of newly germinating flower children on college campuses, ex-hippies living in rural seclusion, and practical-minded folk hopelessly unattuned to the fashion world, the leather-strapped, molded-corkbed-base concoctions looked fine, felt fine, and were the casual shoe of impassioned choice.
"No one," says Fawn Evenson, president of Footwear Industries of America, "expected that Birkenstock and Teva [a rubber-soled sports sandal] were going to eat the lunch of Nike and Reebok. But they certainly have." After creeping along for two decades, Birkenstock's sales, stature, and authority in the shoe industry burgeoned. It took all of the 1970s and most of the 1980s to reach sales of $9 million. Then between 1989 and 1992, Birkenstock expanded nearly 500%, to $50 million. "We grew by pure, unadulterated intuition," says Jones, now vice-president of administration.
Serendipitous fashion flings that adopted retro skirts, gauzy fabric, and your mama's geeky sandals helped, as did the move away from the '80s power suits in favor of a casual look promoted by companies like the Gap and Timberland. The increase in demand wasn't pure luck, though. Birkenstock had launched an active effort to reposition the shoe as an item for more than just the alternative nation and had marketed it with vigor. In 1989 the company hired its first full-time sales representatives and added department-store accounts. Its catalog began featuring upscale weekenders lounging in bistros with toned (and shaved) legs. The expanding product selection of Fraser's distributorship comprises 28 styles including the classic two-strap Arizona sandal in 25 combinations of color and texture.
Like the ugly duckling, Birkenstock was growing up. Sassy magazine first featured the sandals in a 1989 spread, and teenage grungers and preppies alike claimed them as their own. Designer Marc Jacobs had a pair of bejeweled satin Birkenstocks made especially for his 1993 fashion show. Chic publications, including Details, GQ, and Vogue, wrote breathy copy to accompany their pouty models wearing next to nothing above the $76 to $138 sandals.
What this emerging swan was not altogether prepared for, however, was the awkwardness of adolescence. Like other unique products, Birkenstock sandals and their popularity have not gone unnoticed. Creditable alternatives and superficially indistinguishable rivals that sell for a small fraction of Birkenstocks' hefty prices are thrusting the company onto an unfamiliar battleground. Knockoffs, dueling retailers, and a nebulously broadening customer base beg for attention from Fraser and Jones, who still lead the business. While still the undisputed leader of its "comfort shoe" category, the company with the gentle soul is struggling to conform to a threatening new world.* * *
Novato, Calif., is one of the prettiest parcels of rolling land on all of God's earth and a completely likely place for Birkenstock Footprint Sandals Inc.'s headquarters. About 45 minutes north of San Francisco in preciously groovy Marin County, Novato is the kind of place where it seems perfectly logical that Birkenstock's public-relations chief, Lisa Geil, has planned an outing to a Japanese-style spa named Osmosis for my first evening in town. After tea in a dimly lit room adjacent to a rock garden, we recline in pits of Kitty Litter-sized, enzyme-impregnated wood chips that draw impurities from our pores.
And then Geil and the company's marketing manager, Margaret Mackey, suggest we deliver our freshly purified selves to a health-food diner to load up on tempeh burgers and all-natural sodas. We discuss tai chi, the curative powers of papaya, machines that turn brain waves into music, and, only eventually, business.
It's a fitting introduction to the organization's prevailing mood of infinite laid-backness. All of Birkenstock seems to have internalized an interpretation of the company's proximity to the Pacific: nonaggressiveness, even in the face of fierce competition, is the rule.
That casual attitude is attributable to the company's founder and majority (90%) owner. Described in turn as without pretense, unassuming, a possessor of a solid German work ethic, and -- most categorically -- infinitely discreet, Margot Fraser is the operational leader and 64-year-old figurehead of the company. She has an earthy elegance, with her hair perennially swept back in a bun, bifocals hanging around her neck, and a propensity for hand-knit wool sweaters and chunky stone jewelry.
In Fraser's office, centrally located in a sprawl of a building tucked into the hillside along Highway 101, she is open about many issues but determinedly distant about topics she considers private. She won't discuss revenues and profits in detail, although the company shares both with employees. She's warm but remains opaque, apparently not just to outsiders but to her staff as well. In a sentiment echoed by others, Diane Rowe, the company's first director of sales and marketing, tells me, "In some ways, you probably know her as well as I do after five and a half years."
For a long time Fraser led Birkenstock without regard for competition because there was none. Instead of fighting for a share of an established segment, she needed to define a market and create demand. "It took quite a bit of attention in the beginning to explain this shoe," says Fraser in a soft voice. "In Germany people are very conscious of feet and comfort. They have something like 6,000 orthopedic shoe stores. In the United States there are only a thousand."
During the '70s and '80s Fraser's company grew steadily. Independent shoe stores, some licensing the Birkenstock name, formed the core of a network of retailers. Fraser brought them to California several times to meet and share ideas so that if one store ran short of stock it could trade with another. Fraser and Jones took business classes and read books by Peter Drucker and Tom Peters, and each year Fraser wrote a new business plan. Fraser and Jones were business novices, learning as they went along, but so, too, were many of the store owners with whom they were forming business ties and personal friendships.
By 1988 the company had 60 employees and was counting up sales of $8.6 million. Fraser was still concentrating her energy on the product itself, making frequent trips to the German manufacturer to ensure that the sandal styles and colors would appeal to American consumers. Diane Rowe remembers that Birkenstock was "not sales driven" when she joined it, in 1988, as the organization's first sales-and-marketing director. "I lived in the Bay area and worked for another shoe company. I saw this as a brand that people were not really aware of -- a hidden star."
Rowe initiated rudimentary changes: a less funky logo, point-of-sales materials, a public-relations department, and most noticeably, a brighter, yupscale catalog. "Buyers looked at it and said, 'Well, I didn't know Birkenstock looked like this," she says. "They had not seen ordinary, good-looking people wearing Birkenstock shoes. I think the catalog had an enormous impact on retailers and ultimately on consumers as well." She also hired Birkenstock's first real sales force. The new staff members began to tele-market and to travel around the country -- though they hated to call themselves "sales reps," a term with all too aggressive vibes.
With the new marketing push, Birkenstock's name started to appear regularly in the trade press, and demand heated up. "We always knew that we had only so much inventory to give to so many accounts," says Mary Jones. "For a long time we thought we never could sell to the major stores. We didn't think we could supply them, and we wondered if we wanted to 'do that' to our little mom-and-pop stores. But when the demand came, Diane said we had to."
Some of Birkenstock's small accounts bought the company line that the move into department stores and catalog companies would expand their markets, too, by making them beneficiaries of large-store advertising. But many others were anxious and even incensed. They resented the incursion of big competitors that sometimes put them in the position of having to refuse exchanges, for example, to customers who'd ordered ill-fitting shoes from L.L. Bean by mail.
"I'd really dreaded it," says Melanie Grimes, owner of M.J. Feet Inc. in Seattle, one of Birkenstock's largest retailers. For her, though, Birkenstock's expansion has proved neutral. "In some markets I think it's been detrimental, and in some it's been positive," she says. "It really depends on the quality of the retailers and how well they've positioned their businesses."
Three years into the drive that began in 1989, the Birkenstock name was hot and Fraser's company had grown to 145 employees. That's when a supply shortage hit. Fraser thought she had restrained her new distribution commitments until the German manufacturer had the production capacity to fuel her growth, but that company's expansion was hampered by delays. Encouraged by the German government to do business in the East after the Berlin Wall fell, in 1989, the manufacturing company had acquired a factory seven hours away from its headquarters. But training former garment workers to read a leather hide for imperfections and having to wait weeks or even months to get spare parts slowed the 1991 launch of that facility, and much of Fraser's 1992 spring line wasn't delivered until the fall. "It was a miserable time," she says.
Sales had been leapfrogging: $8.6 million in 1988, $15 million in 1989, $25 million in 1990, $38 million in 1991. Fraser had told Forbes magazine that she expected sales to double from 1991 to 1992, but revenue growth stopped short at $50 million. "We didn't have what I consider a bad year," says Jones, "and there were a lot of reasons that our goals changed during the year, but the problems in Germany were the main reason." Isabelle Sender, the comfort-beat reporter for Footwear News, observes, "They got crushed by success. Not to death, but they should have managed it better."
While Birkenstock was patching up the inconsistent supply lines and trying to restore its retailers' confidence, a new threat arose to tax those customers' patience: Birkenstocks were appearing on the so-called gray market. Popular shoe brands are coveted by discount stores, which sell them at extreme bargain prices. Industry experts say that when discounters get turned down for a legitimate wholesale account from the manufacturer, they work through middlemen who obtain the shoes from a variety of difficult-to-trace sources, including foreign distributors, legitimate wholesalers dumping part of their stock, and, some allege, manufacturers themselves that feign ignorance to keep other accounts happy. No matter how the shoes get onto discounters' shelves, the result, in customers' eyes, is the devaluation of a premium product.
Tim Black, who came on as Birkenstock's new sales director last July, says the gray market was a real problem for the company last year, with 10,000 pairs of shoes at a time showing up in discount chains. "In Germany they think they're selling to someone who's distributing to Panama or South America or Israel, and instead the shoes end up on the docks here," he says. He says that Birkenstock is attacking this problem aggressively but that the international aspects make it tricky.
And though Birkenstock hasn't yet faced a challenge as intense as the Nike/Reebok rivalry, all kinds of footwear companies have been nipping at its ankles. There are sandals on the market that are similar in look and price. Naot, an Israeli brand, and Josef Seibel, another German shoe, are similarly comfortable but more delicately styled. Nike has added sandals to its extensive line, and Deckers Outdoor Corp., maker of the Teva sandal, grew from $12 million in 1991 to $57 million in 1993, blowing away Birkenstock's own 8-year-old water shoe. Other established footwear companies have introduced "natural footbed" shoes and comfort sandals, and countless knockoff specialists are mimicking Birkenstocks' look at a quarter of the price.
Still, Birkenstock does remain the name of the category it created, much as Kleenex is for tissues and Xerox for copiers. Peter Mangione, president of the Footwear Distributors and Retailers of America, says that's exceptional in the shoe industry. "There are very, very few instances of foreign manufacturers that have successfully developed their names in the United States. How many can you think of, other than Birkenstock?"
The strength of Birkenstock's name is tied to its message, which has stayed remarkably consistent for 25 years: comfort, repairability, value. The trademark molded footbed has remained the faithful constant throughout the fashion expansion. Jon Schoen, a brand manager and Fraser's stepson, notes, "We're selling the same product that we've sold for 25 years -- with some more colors and some neat styles. But our bottom line is -- and I'll say it softly -- that we're an orthopedic product."* * *
Can Birkenstock keep its customers committed to the costly original? Outsiders voice what the company is unwilling to acknowledge, that Birkenstock's prices are high, and efficient competitors are going straight for that jugular. Footwear News reported in late 1993 that consumers are comparison-shopping more, waiting for sales, and favoring a $40-to-$60 price range.
"There is a feeling that Margot lost touch with the market a little bit," says one observer. But Fraser maintains a stoic and somewhat improbable lack of interest in her competitors. "The market has been expanding, so that it can absorb other companies. Really it hasn't been a big deal," she says dismissively. And she's not the only one who downplays concern. "Copies come and go," Black insists, and besides, "there are going to be people who buy the $49 knockoffs and are happy with them. But that's going to happen no matter what. We don't really have any plans of attack."
The company's resolve, consequently, is not to strike out but to secure -- secure its relationships with stores, its ties to the fashion and trade industries, and its perception among shoppers. With the German supplier back on track -- 1993 deliveries were much better, Fraser says -- Birkenstock has embarked on a campaign to shore up its position as the leading comfort-shoe company. The company is pursuing five strategies as part of the effort:
last fall's launch of a national sales team with representatives at 17 sites throughout the United States;
expansion of the product line that now includes men's dress shoes, children's sandals, and synthetic-fabric shoes for "the nonleather wearer";
a concerted effort to stay on the fashion scene;
a push to improve retail-store relations;
a more structured marketing and advertising campaign.
"I don't think the competitors are that much tougher these days," says Black. "I just think that we need to make sure that the brand stays strong, and that Dillard's, Macy's, and places like them have people on the floor who are educated enough to sell the product properly."
The company's drive to differentiate its offerings from the noise of competing products has met with some success. "Birkenstock is smart: they're going to have the fashion colors; they've got a line builder; they're not just sitting over there being a bunch of yahoos thinking, 'Oh yeah, we'll be very basic and European and stuff," says Cynthia Mullaly, vice-president of the National Shoe Retailers Association. Recently, in fact, Birkenstocks have appeared in fashion shows for Armani, Donna Karan, and Joseph Abboud. "It helps sell our core merchandise," says Mark Lenox, the company's chief product-marketing manager.
All the same, Birkenstock is not forgetting its core customer -- the independent shoe store. The company continues its exemplary in-stock service, shipping even single pairs to its retailers. More common now, the service was almost unheard of when Fraser started to offer it, 25 years ago.
This year Birkenstock is applying more enthusiasm to its promotional efforts. Its new series of advertising pieces, for instance, offers a dozen variations of mock testimonials. Stores drop their names and addresses into the ads and run them locally, and they pay only half the costs. "The 50% copayment is higher than most other manufacturers offer. Many companies pay nothing," says Marlene Bishop, who owns Foot of the Rockies, a retailer in Cheyenne, Wyo.
But even as the competition intensifies, Birkenstock shrinks from national advertising. Black says Birkenstock won't run ads other than those in its co-op program any earlier than 1995. In large part the company will continue to depend on public relations and the work of PR manager Geil to keep the Birkenstock name in the press.* * *
Tension over the challenges it faces belies the serenity Birkenstock favors. The supply problems endured in 1992 and the abrupt halt to revenue growth last year have obscured the company's goals, and the new five-part campaign has engendered some internal upheaval. Last December sales-and-marketing chief Diane Rowe left under conditions that make everybody clam up when her name is mentioned. Fraser herself says that it was a "personality issue" and coolly declines further comment. A key saleswoman, Mary Rodriguez, left Birkenstock last summer to join Yaleet, maker of the Israeli Naot brand, as its West Coast sales manager.
Fraser won't disclose 1993 sales figures but asserts that there was some expansion. The only goal she will state for the record is a sales target of $100 million for 1995. Mary Jones says the company needs a good 1994. "It's real important to us right now that we just stay on track this year, with no major upsets. I wouldn't want to grow too fast beyond that."
But at a time when Birkenstock's dominance is being threatened, focusing on stability may be insufficient. For example, Teva's parent, Deckers, went public last October, netting $32 million destined, in part, for increased advertising and marketing. Birkenstock is one of the Goliaths Teva intends to conquer.
Among Teva's newest offerings is a brown-leather-strap version of its popular nylon-strap comfort sandal. The word on the street is that when a certain Teva sales rep calls on his customers, he unwraps the shoe and dangles it from his fingers. With the confident smirk and narrowed eyes of someone who knows he's on a roll, he leans forward, takes a deep breath, and quietly, in a smooth drawl, declares, "This here is our Birkenstock killer."
If Margot Fraser were there, could she still look away?
THE SINCEREST FORM OF FLATTERY
If you invent a product or service, you'll have one main goal when you come to the marketplace: getting people to be receptive to your unique offering. But if popular acclaim comes your way, it can be as much a liability as an asset. Competitors either imitate or one-up successful ideas, and defending your market against encroaching opponents is a different and complicated challenge.
It's easier for rivals. They simply respond to your winning strategy with alternatives. You're expensive? They're cheaper. You offer a dozen choices? They've got one -- styled after your best-selling selection. You're targeting part of the market? They'll take the rest.
Establishing your position as industry leader isn't enough. If you manage to do that, that's when it's time to reassess service, distribution channels, pricing, quality, and even inventory control.