Nineteen eighty-nine was a good year for Botana, Czechoslovakia’s best-known manufacturer of sports shoes. Production and sales were up, and the company exported 600,000 pairs of shoes – one-third of production – to the Soviet Union. In a now-familiar story, Botana watched its biggest account dry up the next year: in 1990, the company did not sell a single pair of shoes to the USSR. In the same year, international shoe baron Tomas Bata began his quest to recover his family’s Czech shoe empire. And Western shoemakers began shipping their higher-priced, higher-quality shoes to Czechoslovakia en masse.
Reaction at the company’s Skuteˇc, East Bohemia, headquarters was swift. Management immediately considered two possibilities: licensed pro-duction or a joint venture, with either option to be undertaken with a famous Western name. Botana opted for the licensed production. Puma and Sa-lomon, two of Europe’s top brands in sports shoes and sports equipment, were chosen, and Botana began production of Puma tennis and basketball shoes for the local market. In 1991, Botana production made its way into Puma’s sales network. In 1992, the firm expanded its Puma production to include football (soccer) shoes; these shoes were also sold internationally through Puma’s existing distribution system. Impressed with Botana’s qual-ity (and its low wages) Puma eventually closed its Herzogenaurach, Germany, factory and moved the factory’s entire sports shoe production to Botana. In 1993 Botana produced 350,000 pairs of top-of-the-line football shoes; most were exported.
Canstar, a Canadian manufacturer of sports equipment and shoes, was interested in establishing a joint venture, but the deal fell apart. Botana’s director, Miroslav Posp´ıˇsil, jumped ship in 1993 and arranged for Canstar to invest in a new green field site in ˇZd´ar nad S´azavou, not far from Botana’s home in Skuteˇc. Like Botana, the new factory produces the upper part of ice hockey skates. There is one rub: Botana also operates an ice hockey manufacturing line in ˇZd´ar nad S´azavou: the two factories sit a mere 50 meters from one another.
Proving that Botana could manufacture to Puma’s quality standards was an important step, according to Jaromir Pecina, the company’s Trade Direc-tor: “The first six months were difficult, but after confirming that Botana was able to produce good quality shoes, Puma trusted us more.” Gaining access to the Puma network was also critical. Like other Czech and Slovak shoemakers, Botana’s reliance on only two wholesalers (Velkoobchod Obuvy
This case was written from public sources with some cooperation with Botana executives who wish to remain anonymous. It does not have the official approval of the company.
Zl´ın in the Czech Republic and Partizansk´e Obuvy in Slovakia) proved dis-astrous. “Our wholesale network was completely bankrupted,” said Pecina.
“We had to build our own warehouse in Heˇrman ˙uv Mˇestec [about 25 kilo-meters from Skuteˇc]. On the export side, two foreign trade organizations, Exico and Prago export, just left us.”
But while Botana was producing and exporting ever greater numbers of increasingly high-quality shoes, it was also importing shoes from Puma, Sa-lomon, and Kneissl-Dachstein. “We were a sales agent for our own country,”
said Pecina. Imports soared. “The situation got worse and worse. [Manage-ment] wasn’t watching what they bought; they weren’t paying attention. It was a time when everyone wanted to be an ‘entrepreneur,’ everyone wanted to be ‘in business.’ ” The firm ran into severe cash-flow problems, and insol-vency loomed. The domestic market shrank in 1992 (sales fell about 15%), and secondary insolvency, the never-ending bane of the Czech economy, be-gan to bite.
Botana’s line of products was extensive – too extensive, according to ex-ecutives. The firm’s showroom was regularly packed with every conceivable variety of football shoe, cross-country ski boot, and hockey skate. Even so, Pecina feels in the “winter shoe” market, Botana has no rivals. “Summer shoes” are a different story. Competition from cheaper East Asian producers became fierce in 1993. Pecina acknowledges this fact: “There is big compe-tition now from the Far East. Their quality is low, but so is their price.”
Pecina estimates that Botana has perhaps a 10% share of the “summer”
sports shoe market, good enough for first place among name brands. Adi-das, which moved into Czechoslovakia early, occupies second place. Pecina states, “We are the most well-known brand; Adidas is second.” Heavy hit-ters like Nike and Reebok have increasing market shares, but their prices are still high for the average Czech.
The company’s turnaround year was 1994. The firm’s privatization was finally completed, and with a new director in place, shareholders approved a three-year development plan. After evaluating competitors’ production costs, Botana took a look at its own. The firm then worked on rationalizing production in the specific product groups where it felt it had a competitive advantage. Cost of goods sold and production expenses fell 30% from 1993.
According to executives, this helped Botana concentrate resources in product development and further innovation. Production cooperation with private workshops in Slovakia – uppers are sown in Slovakia with elastic sown on in the Czech Republic – has proved profitable. Following its gains in produc-tivity and implementation of higher quality standards, Botana garnered an ISO-9000 certificate.
Turnover fell 18% in 1994, but costs dropped further, by 22%. Value added increased substantially, up 23%. By the end of the year, Botana had
reduced its copious inventories and short-term receivables by more than a factor of two, from Kˇc104 million, to Kˇc48 million. Cash and other mar-ketable securities increased as well, from Kˇc4.7 million to Kˇc52.5 million (see financial statements inBotana Exhibit 1 andExhibit 2). Although bank debt increased 15% from 1993 to 1994, Botana managed a restructuring at lower interest rates. Short-term payables were cut in half.
Has Botana turned things around? Pecina thinks so, but with one or two reservations. The firm has capacity problems now, and must choose carefully in which product groups it will concentrate. Executives say innovation and subsequent investment will be limited to areas where Botana can be price competitive. This rules out the cutthroat summer sports shoe market; new designs can be expected in skates and field athletic shoes, where the firm already has high quality standards.
Botana has concentrated on recovering lost markets to the East, partly in response to seasonal sales fluctuations in Western markets, but also be-cause of its still-intact reputation and contacts. This is not without dangers, however. The firm still has trouble with payment from Central and East European markets, but hopes to get a handle on these foreign receivables problems with its new financial plan. Investment privatization funds own 75.8% of Botana equity. Individual voucher holders own 9.8% and employees another 1.0%. Another 13.6% has been distributed to restitutees (individ-uals whose property was taken from them following the takeover by the Communists in February 1948).
Botana Exhibit 1. Balance sheets (in thousand Czech korunas).
1994 1993
Assets 538,292 598,507
Fixed assets 185,974 188,952
Intangible fixed assets 631 731
Tangible assets 184,143 186,621
Financial investments 1,200 1,600
Current assets 352,318 384,374
Inventories 130,947 172,588
Short-term receivables 145,830 207,024
Cash and marketable
securities 52,554 4,762
Other assets 22,987 25,181
Liabilities 538,292 598,507
Basic capital 205,387 205,387
Capital funds 7,747 10,313
Funds from profit 12,773 9,738
Profit/loss of
previous period (40,914) 0
Profit/loss of
current period 1,616 (37,879)
Reserves 3,325 3,132
Short-term payables 106,815 214,908
Bank loans and grant-in-aid 228,894 184,471
Other liabilities 12,649 8,437
Botana Exhibit 2. Income statements (in thousand Czech korunas).
1994 1993
Sales 720,421 874,380
Total costs and expenses 718,805 912,259
Cost of goods sold 479,087 622,850
Personal expenses 146,315 143,176
Depreciation, taxes, and fees 13,924 13,680
Interest and other financial costs 44,968 82,384
Value added 191,142 148,503
Profit (loss) 1,616 (37,879)