The evolution of Crocs, Inc.: will Crocs face extinction?

Droege, Scott ; Dong, Lily C.

CASE DESCRIPTION

The primary subject matter of this case concerns the four "Ps" of marketing--product, price, place, and promotion. Secondary issues examined include entrepreneurship and business strategy. The case has a difficulty level three, appropriate for junior level courses. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.

CASE SYNOPSIS

Crocs, Inc. was founded in 2002 by three avid boaters who began a small company to make shoes specifically designed for boating. The owners were surprised by their own success; Crocs rapidly moved from a boating shoe to a fashion statement. After taking the company public in 2006, Crocs has come under increasing shareholder pressure to diversify. The fear was that Crocs limited product line was a "one trick pony" and as soon as consumer fashion tastes changed, Crocs sales would quickly decline. Crocs has responded to this pressure by moving beyond shoes to increase the variety of its product line, but in doing so the firm has encountered entrenched competitors that have fought back against Crocs' market encroachment. Management is well aware that competition and shifting consumer tastes could make Crocs extinct. These threats will drive Crocs to further hone its product, place, pricing, and promotion decisions. Exactly how Crocs will manage this, however, remains to be seen.

BACKGROUND: THE BIRTH OF CROCS

The birth of Crocs began in May of 2002, when three friends from Boulder, Colorado went sailing in the Caribbean. This was a rather unremarkable event in itself. However, soon their names, Lyndon "Duke" Hanson, Scott Seamans, and George Boedecker, would become well-known in the footwear industry.

The thing that made this sailing trip stand out lay in the hands of one of the friends, or rather on his feet. Scott Seamans had purchased a pair of foam clogs in Canada. Impressed by their performance while boating, the three friends began visualizing the perfect boating shoe. They envisioned shoes that were comfortable, functional, and durable. This led them to the idea of Crocs.

Crocs are made from proprietary closed-cell resin material, which the company often refers to as croslite, that feels nearly weightless. In fact, a pair of the largest size of Crocs available weighs less than six ounces. The closed-cell resin softens with body heat and molds to the shape of the foot. Also, because the material is closed cell, it's anti-microbial so it virtually eliminates odor. To add to their functionality, the soles are non-marking and slip resistant and don't hold mud or debris and the ventilated toe box is designed so that air, water, or sand can filter through the shoes. Crocs are extremely easy to maintain and can be sterilized, bleached, or washed in a washing machine. They are also ideal when it comes to comfort standards, with features like built-in arch support, orthopedic heel cups, circulation stimulation nubs on the insoles, and supportive orthopedic molded soles.

Although Crocs has been able to patent the basic design, problems remained. The weakness of the patent is such that competitors can easily copy the basic elements of Crocs' products with only minor modification. Nevertheless, Crocs believed its niche market would value the "original" and would hesitate to switch to competitors. Early, on, this was a correct assumption until Crocs gained momentum. As the market niche was developed, however, Crocs had the market to itself. One reason is not so much related to the relative weakness of its patents, but to the idea that competitors viewed Crocs as ugly shoes that would not appeal to a broad customer base. This bought time for Crocs to establish a foothold.

Hanson, Seamans, and Boedecker decided to turn their ideas into reality and focus on developing and marketing their innovate footwear. They leased their first warehouse in Florida, chosen because of its location "specifically so we could work when we went on sailing trips there," Hanson says. "From the get-go, we mixed business with pleasure." While it may not have been the traditional business strategy, their mixture of business and pleasure worked and the reality of Crocs began to form.

Crocs began marketing its shoes at a November 2002 boat show. Crocs were originally intended to be sold to boaters, because of their slip proof, non-marking sole and the fact that they are waterproof and odor resistant. However, this market soon expanded to include gardeners, healthcare workers, waiters, and other professionals who had to be on their feet all day. This market began to encompass markets Crocs had never considered. Over the course of a year what had started out as simply an idea on a sailing trip evolved into one of the greatest footwear phenomena of the decade.

As the popularity of Crocs rapidly increased, its founders began to realize just how much potential the company had. "I ran day-to-day operations," Hanson said. "During the day, I would answer the phones and handle the required paperwork to set up the business entity wherever we were doing business. After dinner, I'd come back and enter orders until I fell asleep in my chair." Soon Hanson realized that even working sixteen hour days the three friends could not keep up with the demand by themselves.

This led Crocs to make the company's first office hire, Tegan Sarbaugh. The number of employees would continue to grow exponentially in the years to come. In an effort to help the company reach its greatest potential, the three founders made one of their best hiring decisions and brought in Ronald Snyder as CEO and President of Crocs, Inc. Snyder was a former Flextronics executive and an old college friend of Crocs' founders. He was asked to do some consulting for the new company and soon realized the promise Crocs held.

Snyder decided on a revolutionary business distribution model for Crocs. The established methods of distribution forced retailers to order shoes months in advance and buy in bulk. Instead, Crocs allowed retailers to order only several weeks in advance and to order as few as twenty-four pairs of shoes. This strategy encouraged consistent pricing by preventing the problem of overstocking and having to sell Crocs on clearance. More importantly this strategy catered directly to customer needs by allowing Crocs to deliver currently popular styles and colors quickly to customers.

In 2004, Snyder made one of the most beneficial business decisions in the history of Crocs. Snyder decided to buy Finproject NA, a Canadian manufacturer who made Crocs and owned the formula for their proprietary material, the closed-cell resin known as croslite. Upon their purchase Crocs, Inc. gained control over manufacturing and timing. Snyder describes this as a "eureka" moment. "We had everything required to take the company to the next level," he says. "Proprietary processes, proprietary material, intellectual property, and distribution."

THE IPO AND GROWTH OF CROCS

Four years after it was founded, Crocs, Inc. became a publicly traded company. There were several reasons why the company owners chose to go public. Firstly, they wanted to untie their assets by exchanging their equity for cash. Also, the public market was more liquid than the private market. One important factor to keep in mind is that Crocs did not go public simply because the company needed cash, a common action for struggling companies. Crocs' decision to become a publicly traded company did not reflect decline, but rather tremendous growth.

The company filed for an initial public offering on August 15, 2005. On February 8, 2006 Crocs announced its public offering. Crocs, Inc. common stock was listed on the NASDAQ stock market the CROX ticker symbol. The initial offering price was to be $13.00 to $15.00 but was revised to a range of $19.00 to $20.00. The first day opening price was $30.00. Since then, CROX has roughly tripled on a split-adjusted basis.

During the six month span from January 1, 2006 to June 30, 2006 Crocs, Inc.'s revenues increased from $36.7 million to $130.5 million, an increase of over 350%. The first quarter alone had revenues of $44.8 million, an increase of more than fourfold over the revenues of the first quarter of 2005, which were $11.0 million. Also during the time between January 1, 2006 and June 30, 2006 the Crocs net income went from $6,441,000 to $15,666,000.

THE FOOTWEAR INDUSTRY: WHEN CROCS ATTACK

Crocs, Inc. has made immense progress within the footwear industry. In its fourth year of business, Crocs already has financial numbers that hold their own amidst companies that have been competing in the footwear industry for decades. Crocs, Inc. is classified as being in the Footwear Industry of the Consumer Cyclical Sector. The following statistics compare Crocs to the Footwear Industry as of December 12, 2006.

As the charts above show, Crocs is ahead of the industry in many areas. Its growth rate is over 900% higher than that of the industry. This shows the potential that Crocs has within the footwear industry but also illustrates the risk investors are taking on a concept that may or may not be simply a fad. The hard question Crocs owners must face is whether Crocs is going to fade away like bell bottom jeans or have staying power like Nike athletic shoe lines. The next section considers how the marketing mix addresses some of these challenges.

EVOLUTION OF CROCS' MARKETING MIX

Products and Target Market

Crocs currently targets multiple market segments ranging from boaters to gardeners to simply individuals wanting a comfortable pair of sandals. However, the firm's initial target market was boaters. Crocs' initial foray into the market was an effort to provide a comfortable pair of non-slip boating shoes to a niche market. This target market soon expanded to others who would pay a premium price for comfort. Nurses, retail store clerks, and others who spent most of the day on their feet quickly recognized the value proposition Crocs offered: while expensive, these individuals were willing to pay a premium to avoid the discomfort of traditional shoes. Today, Crocs targets an even wider swath of the market. Crocs' product category advertisements state that Crocs are for "women, men, kid, sports, and everyone." To further broaden their market, Crocs advertises that among these segments, customer will find its products to be comfortable "on the beach, around the house, in the rain, in cold weather, off the road, for walks in town," and even something that will "look good in the office." Crocs has kept its original characteristics of light-weight, non-slip, brightly colored product lines while created additional styles to accommodate the needs of different consumers. Crocs also offers apparel products such as t-shirts, shorts and even women's leggings.

Pricing and Distribution

Crocs footwear charges an average retail price of $30 per pair. To maintain its image as a premium mix of quality and comfort, Crocs does not utilize incentives to retailers that offer sales promotions. An advantage of this is that Crocs avoids margin squeezes often associated with retail price incentives. A disadvantage is that Crocs discourages retailers from using price concessions to help clear out inventory build-ups.

Crocs chose to bypass the traditional distribution models of incumbents such as Nike and instead adopt a distribution model with similarities to just-in-time inventory management. Rather than having retailers order large quantities months in advance that might result in clearance sales, Crocs has allowed retailers to order as few as 24 pairs of shoes. Shorter waiting periods and smaller order quantities allow retailers to accommodate changing consumer tastes and deliver the most current styles available.

In addition to conventional retail distribution channels, online distribution is another major tool Crocs utilizes. Up to this point, Crocs has managed to avoid the channel conflicts that often arise when suppliers bypass retailers by offering products directly via the internet. However, as competition heats up, retailers could potentially opt for lower-priced alternatives to Crocs in response to Crocs online distribution.

Promotion

Most marketers will agree that brand name itself is the most direct economic tool for promotion. A successful brand name should be simple, meaningful, easy to pronounce and easy to remember (Keller 1998). The brand, "Crocs," was derived based on the water-repellent nature of the materials used, the toughness of the products to withstand the elements while still fitting like a skin rather than a traditional shoe.

The major promotion tools Crocs has been using are online promotions and magazine print ads. Online promotion is achieved by displaying customer testimonials about how customers enjoy wearing Crocs footwear. For example, Lena ANG wrote, "We've just returned from a winter holiday in Perth. Though it was cold, we were pleasantly surprised that our Crocs could still keep our feet warm even without socks. Our Crocs took us to the farms, deserts and even the sand dunes. I must say that they came in handy when we did our sand-boarding activities at the sand dunes. We didn't have to carry all the sand back to our hotel in our shoes. "The customer's story explains the usage benefits of Crocs shoes and reduces doubt that Crocs might be good only for boating and gardening. Crocs website also provides a list of "shows and events" the company attends at different cities and towns across the US during the year so that it can capture exposure and publicity with minimal expense. Crocs also uses press releases and public relations to create good will among consumers through designing events such as "breast cancer awareness month" when they donate five dollars to the Breast Cancer Research Foundation for every pair of a certain style purchased through the company website. Crocs' print ads are often found in magazines such as Curve.

CURRENT CHALLENGES: THE EXTINCTION OF CROCS?

The Crocs brand has become a general term to describe brightly-colored, lightweight shoes similar to Kleenex as a generic term for facial tissue. However, the market has become filled with more and more 'imposter' Crocs. These shoes are being sold in a wide range of stores, from small retail stores to massive chains including the formidable retailer, Wal-Mart. These imitations are often more easily accessible than Crocs as well as less expensive. While a basic pair of Crocs sells for around $30, imitation Crocs can be found for as little as $5.

Another challenge Crocs is facing now is competition from strong footwear brands such as Sketchers. Sketchers has launched its new "Cali Gear" product line with more styles and weight similar to Crocs. With the advantage of Sketchers' established distribution channels, the Cali Gear brand has easily taken the in-store display spots in all the major retailers such as Sears and FredMeyers. It is a head-on competition with Crocs. Cali Gear captured more distribution channels while Crocs seems to be holding the specialty product retailers. Even though Crocs has made great efforts and achieved success in expanding its product lines to attract a wider range of customers, its distribution channel remains relatively limited, especially in comparison to competitors such as Sketchers.

Combating Challenges

One factor giving Crocs, Inc. an advantage over imitators is its customer loyalty. Crocs fans are the company's best method of advertisement. The hoards of satisfied customers claim that no other shoes can replace their Crocs. In fact, some of these customers claim that they were convinced to buy Crocs by other Croc wearers. The shoes attract attention and when this attention is expressed the owners communicate their passion and loyalty for the brand. 'Imitation' Crocs don't have this wide-scale loyalty and word of mouth advertising. However, are Crocs fans enough to keep the company afloat in world full of predators?

Crocs, Inc. has already taken steps to defend its status. As of April 3, 2006, the company had received four patents issued by the U.S. Patent and Trademark Office. These patents cover a range of utility aspects of most of Crocs footwear, as well as design elements of their more popular styles, including the Beach, Cayman, Nile, and Highland models. Additional patents have been filed regarding some of Crocs other shoe styles. Also, the company has either filed for or received a number of other patents covering its styles in other areas of the world, including European Union, Asia, South America, Australia, and Canada.

In addition to patents, Crocs, Inc. has also filed complaints with the U.S. International Trade Commission and the U.S. Federal District Court against eleven companies that manufacture, import, or distribute products that Crocs, Inc. believes infringe upon company patents. In a recent ITC compliant, Crocs requested an order that prohibits all future imports of these infringing goods as well as prohibiting further sale of infringing goods that are already present in the United States. As of June 2006, Crocs had already settled in three lawsuits involving infringements on its patents. Inter-Pacific Trading Corporation, Inc., Shaka Holdings, Inc., and Acme EX-IM, Inc. were all found guilty of infringing on patents held by Crocs, Inc. These companies were forced to abandon or modify their current shoe designs to avoid infringement in the future. Ron Snyder, the CEO and president of Crocs, stated:

"We are very pleased to have the unique qualities of our footwear recognized by the issuance of these patents. We take great pride in the design and construction of our products and receipt of these patents demonstrates the level of innovation we have applied to our footwear. We also take very seriously our responsibility to protect this intellectual property. Although consumers have clearly demonstrated their desire for the genuine Crocs brand, it is incumbent upon us to fully protect our intellectual property and we will do so in every appropriate instance where we believe our intellectual property is being infringed."

Crocs, Inc. already has plans to increase its sales and beat out their competitors. The company has expanded to include a wide range of products in addition to shoes. Customers can now purchase Crocs apparel, umbrellas, knee pads, beach towels, and sunglasses. One of Crocs' current projects is to open its own retail store in New York City. The 1,600 square foot store will be located in the upscale SoHo district. Crocs has also begun producing specially branded Crocs for companies such as Google, Tyco, and Flextronics, as well as for sports teams like the L.A. Lakers. At least seventy colleges have preordered more than half a million pairs of Crocs made in their respective school colors.

One of Crocs' major endeavors is targeted toward maintaining its youth market. The company has recently made a deal with Walt Disney to produce Disney Crocs. The first of this line, featuring Mickey Mouse shaped holes, have already been released. More designs in the Disney line are planned including Mickey Mouse and Friends, Winnie the Pooh and Friends, Disney Princesses, Disney Fairies, as well as Pirates of the Caribbean and Disney Pixar's Toy Story and Cars. Others will be released in accordance with the release of new Disney movies. Snyder predicts that this strategy will "help offset the copycat factor."

Crocs management hopes to increase its market overall by giving customers an ever wider range of choices. In the spring of 2007, Crocs added nine new models to its collection. These models include a high heel, a new flip flop style, and versions similar to the more traditional Crocs, except in two-tones and patterns. In addition, a modified color palette is available including new colors like celery, lavender, cotton candy, and sea foam.

One recent financial endeavor came when Crocs, Inc. acquired the membership interest of Jibbitz, LLC. Jibbitz specializes in the customization of Crocs, including accessories such as bracelets for Crocs and charms that fit in the holes of Crocs. The purchase price of Jibbitz was $10 million, but, based on Jibbitz's future earnings targets, it has estimated potential revenues of an additional $10 million. Ron Snyder commented "We are very excited about this acquisition as we believe Jibbitz represents a tremendous strategic fit for our company. We look forward to leveraging each organization's strengths in order to fully capitalize on the many new and exciting growth opportunities in our future."

Crocs customer loyalty and multiple attempts to expand and satisfy its target market shows Crocs potential. However, despite Crocs' efforts to protect its products patents and lawsuits, competitors remain a very real threat. The questions that must now be asked are: how can Crocs stay ahead of competitors? Will Crocs be able to maintain its status at the top of the food chain or is it an endangered species that fades into extinction?

REFERENCES

Anderson, Diane. 2006. When Crocs attack. Business 2.0, November 1.

Bosley, Elisa. 2004. Crocs rock. Footwear News, February 9.

Crocs, Inc. 2006. S.E.C. 10K Filing. December 31.

Fidelity Investments. 2007. Company research highlights: Crocs, Inc. August 8.

First Call. 2007. First Call earnings valuation report: Crocs, Inc. August 1.

Keller, Kevin Lane 1998. Strategic Brand Management. Upper Saddle River, New Jersey

Matson, Tia. 2007. Crocs, Inc. extends sports licensing business with addition of Major League Baseball. Crocs, Inc. Press Release. July 19.

Matson, Tia. 2007. Crocs names U.K. Footwear Brand of the Year. Crocs, Inc. Press Release. July 7.

Crocs, Inc. 2007. S.E.C 10Q Filing. March 31.

Hudson, Kris. 2007. Crocs on the catwalk. The Wall Street Journal, Feb, 13.

Jackson, Candace. 2006. Clogs put their best foot forward. The Wall Street Journal, July 22.

Pickett, Debra. 2006. Flip-flopping on Crocs. Chicago Sun-Times, June 30.

Russak, Brian. 2006. Marketing highs. Footwear News, Sept. 15.

Scardino, Emily. 2006. Brand of The Year Award. Footwear News, December 5.

S&P Compustat. 2007. Company reports: Crocs, Inc. July 9.

Thomson Financial. 2007. Crocs, Inc.: Company in context report. July 21.

Scott Droege, Western Kentucky University

Lily C. Dong, University of Alaska-Fairbanks

Table 1: Valuation Ratios

Description                                 Company     Industry

P/E Ratio Trailing 12-Months (TTM)           35.74       21.49
P/E High--Last 5 Yrs.                         NM         27.69
P/E Low--Last 5 Yrs.                          NM         14.10
Beta (Stock Price Volatility)                 NM          0.76
Price to Sales (TTM)                          6.11        2.00
Price to Book Most Recent Quarter (MRQ)       9.45        4.00
Price to Tangible Book (MRQ)                  9.97        4.48
Price to Cash Flow (TTM)                     31.33       17.80
Price to Free Cash Flow (TTM)                 NM         24.76
% of Shares Owned by Institutions            85.48       68.19

Description                                 Sector      S&P 500

P/E Ratio Trailing 12-Months (TTM)           19.36       20.64
P/E High--Last 5 Yrs.                        31.37       37.82
P/E Low--Last 5 Yrs.                         13.99       14.72
Beta (Stock Price Volatility)                 1.09        1.00
Price to Sales (TTM)                          1.41        2.93
Price to Book Most Recent Quarter (MRQ)       3.59        3.92
Price to Tangible Book (MRQ)                  6.42        7.20
Price to Cash Flow (TTM)                     12.77       14.56
Price to Free Cash Flow (TTM)                30.22       32.40
% of Shares Owned by Institutions            55.20       68.39

Table 2: Growth Rates

Description                                  CROX       Industry

Sales (MRQ) vs Qtr. 1 Yr. Ago               190.76       20.87
Sales (TTM) vs TTM 1 Yr. Ago                242.50       12.20
Sales--5 Yr. Growth Rate                      NM          9.45
EPS (MRQ) vs Qtr. 1 Yr. Ago                 143.59        6.98
EPS (TTM) vs TTM 1 Yr. Ago                  245.63        7.48
EPS--5 Yr. Growth Rate                        NM         18.79
Capital Spending--5 Yr. Growth Rate           NM          0.91

Description                                 Sector      S&P 500

Sales (MRQ) vs Qtr. 1 Yr. Ago                 8.29       15.97
Sales (TTM) vs TTM 1 Yr. Ago                  9.32       16.71
Sales--5 Yr. Growth Rate                      7.96        9.90
EPS (MRQ) vs Qtr. 1 Yr. Ago                   5.49       23.85
EPS (TTM) vs TTM 1 Yr. Ago                   21.81       23.52
EPS--5 Yr. Growth Rate                       12.95       15.71
Capital Spending--5 Yr. Growth Rate           3.38        5.73

Table 3: Profitability Ratios

Description                                  CROX       Industry

Gross Margin (TTM)                           55.67       43.75
Gross Margin--5 Yr. Avg.                      NM         41.82
EBITD Margin (TTM)                           28.38       15.19
EBITD--5 Yr. Avg.                             NM         13.70
Operating Margin (TTM)                       26.19       13.53
Operating Margin--5 Yr. Avg.                  NM         11.19
Pre-Tax Margin (TTM)                         26.39       13.60
Pre-Tax Margin--5 Yr. Avg.                    NM         11.14
Net Profit Margin (TTM)                      17.36        8.86
Net Profit Margin--5 Yr. Avg.                 NM          7.40
Effective Tax Rate (TTM)                     34.23       34.70
Effective Tax Rate--5 Yr. Avg.                NM         34.70

Description                                 Sector      S&P 500

Gross Margin (TTM)                           30.64       45.17
Gross Margin--5 Yr. Avg.                     30.80       44.89
EBITD Margin (TTM)                           12.19       23.06
EBITD--5 Yr. Avg.                            11.34       20.85
Operating Margin (TTM)                        8.49       20.26
Operating Margin--5 Yr. Avg.                  8.14       19.00
Pre-Tax Margin (TTM)                          8.46       18.95
Pre-Tax Margin--5 Yr. Avg.                    7.64       17.17
Net Profit Margin (TTM)                       5.58       13.67
Net Profit Margin--5 Yr. Avg.                 4.92       11.67
Effective Tax Rate (TTM)                     31.70       30.49
Effective Tax Rate--5 Yr. Avg.               36.86       31.84

Table 4: Financial Strength

Description                                  CROX       Industry

Quick Ratio (MRQ)                             2.62        1.94
Current Ratio (MRQ)                           3.45        3.13
LT Debt to Equity (MRQ)                       0.01        0.06
Total Debt to Equity (MRQ)                    0.01        0.11
Interest Coverage (TTM)                      91.98       18.32

Description                                 Sector      S&P 500

Quick Ratio (MRQ)                            1.34         1.22
Current Ratio (MRQ)                          2.12         1.73
LT Debt to Equity (MRQ)                      1.43         0.58
Total Debt to Equity (MRQ)                   1.55         0.73
Interest Coverage (TTM)                      7.22        14.77