Flip Flop Goes Crocs
The Business Strategy Behind the Rise, Flop and Comeback of Crocs.
Ahh, how nice it is to feel summer approaching. The weather is getting warmer, people are eating en terrasse, having picnics in the park…
But you know what else comes with summer?
Bare toes and horrifically ugly open-toed sandals.
Indeed, every summer cities around the world are plagued with one of the ugliest articles of clothing known to mankind: sandals. Unless you are around a pool, a beach, or you happen to be in ancient Greece or ancient Rome (good luck with that), I think it’s safe to assume that very few people want to see bare feet or toes out in public. Very few.
So what can you do? Well, you could rock any of the recommendations by George Hahn, or opt for the closed-toe alternative that is the focus of this week’s article, Crocs.
This week, we are focusing on Crocs. More specifically, in this article we will analyse Crocs’ business strategy in hopes of understanding how the ugly shoe company was able to rise so quickly in the late 2000s and why it crashed so epically during the 2008 crisis. Then, we will explore how Crocs was able to come back to where it is today.
Table of Contents
The Early Crocs Story
How Crocs Took Off
The 2008 Crisis
The Pandemic & Post-Pandemic
The Early Crocs Story
The story of how Crocs came to be is fascinating. It starts on a boat in the Caribbean (of all places).
Three friends from the University of Colorado, Scott Seamans, Lyndon Hanson and George Boedecker, were on holiday sailing in the Caribbean. On this boat, Scott was wearing a boat shoe made by a Canadian business he was working for, Foam Creations. The shoe was comfortable to wear, could float, and it was nearly impossible for it fall off. Bref, it was the perfect boat shoe.
Proud of his purchase, Scott showed his revolutionary boat shoe to his friends. The reaction?
“Wow that’s ugly”.
However, Lyndon and George could not deny the utility of the shoe and skip forward a couple days later, and the two friends were convinced. So much so that all three friends decided that they wanted to make a company around it. They headed back to Miami, bought a garage and lived on a boat to save money. With the money they saved, the trio acquired the rights to the manufacturing process and developed Croslite foam technology. Croslite is a proprietary closed cell resin material that is lightweight, odour-resistant and ergonomic.
Having developed the Croslite foam technology, the trio created 200 pairs of “The Beach” and headed out to the 2002 Fort Lauderdale Boat Show. At the show, they set up a booth and showed their creation to the world. The result? The booth was swarmed and boat enthusiasts liquidated their stock.
The three friends had something.
The trio tripled down on “The Beach” and began producing more. By the end of the year, they had $24 000 in net profit. The company continue to grow and by 2005, they had enough money to buy out Foam Creations and consequently found Crocs. The name is an allusion to the versatility of the crocodile which can travel on land and water, like their shoes. From that point, the Crocs took off.
How Crocs Took Off
In 2004, Crocs had $24 000 in net profit. By the third quarter of 2005, the company sold 4.4 million shoes, hitting revenues of $75 million. Just a year later, in 2006, the company IPO’d and was the largest-ever US footwear IPO of the time. By 2007, the company reached revenues of $168 million. How did they achieve such phenomenal growth? By leveraging a proprietary competitive advantage, a low cost business strategy, and the power of personalization.
How a Proprietary Competitive Advantage Created Economies of Scale
What is the dream of any business? To have a patented competitive advantage. Why? Because having a patented competitive advantage creates very high barriers to entry.
And a proprietary competitive advantage is precisely what Crocs had. Their patented Croslite technology enabled Crocs to produce a moulded shoe, which is significantly simpler and faster to produce than any other sneaker. The fast production cycles allowed Crocs to produce at an unprecedented rate and unlocked unique economies of scale that no other shoe company could compete with. However, a proprietary competitive advantage is not enough to convince a buyer — the product needs to be well differentiated and offer a clear value proposition.
Low Cost Strategy + Clear Value Proposition = Profit
The value proposition of Crocs was purposefully clear: the shoes provided comfort and were incredibly versatile. A first-time Crocs wearer will find that the shoes are springy, light, and provide a “marshmallow fluffiness” to their feet. On top of that, the shoes were easy to clean, water-resistant, “vegan”, no-slip, and extremely light. In short, they were extremely comfortable and versatile. Doctors, cooks, clerks, and other workers who stand on their feet all day quickly took up the Crocs. However, they were ugly. So much so that some fans faced a Crocs Conundrum - which is that although the shoes were ugly, they could change your life.
The best part? This comfort and versatility was available for just $29.99.
The fact that Crocs were moulded enabled the company to adopt an extremely low cost strategy. In addition to this, the company invested in an expansive distribution network that put Crocs everywhere: grocery stores, shoe stores, malls, e-commerce, etc. — Crocs were simply everywhere. Their economies of scale enabled them to expand their distribution network without significantly increasing marginal cost. Their expansiveness created multiple touch points with buyers, which worked to reduce their natural guard. Eventually, shoppers justified their purchase of a clog as a “trial” or “just for the home”. What happened however, was different: they fell in love with the shoe’s comfort and versatility.
However, while Crocs were everywhere, the company quickly started facing a problem: most of their target market already had a pair of Crocs. To overcome this, they opted for personalization.
Personalization as a Revenue Growth Strategy
How do you increase revenue when you’ve nearly saturated the market with your product and don’t have a significant product innovation? You enable people to personalize their product.
Personalization, when leveraged correctly, can be an incredibly powerful strategy to increase revenue. Indeed, a Deloitte study found that 1 in 5 consumers who expressed an interest in personalised products would be willing to pay a 20% premium. Additionally, 48% of customers would be willing to wait longer for a personalized product. In short, customers are willing to pay more for personalized products.
For Crocs, the choice was straight-forward. The company realized that they could get people to buy another pair of Crocs if they offered the Crocs in a different color or style. As a result, they unleashed a nearly infinite array of different colors and styles. Rainbow Crocs, tie dye Crocs, camo Crocs, fluffy Crocs, Nemo Crocs, Disney princess Crocs, you name, it exists.
While offering a variety of colors and styles for the base of the shoe was an excellent idea, the real unlock came from the Jibbitz. In 2006 Crocs acquired Jibbitz, a manufacturer of small button-like accessories for Crocs for a reported $20 million. As a result of this acquisition, individuals could now purchase packs of Jibbitz to add to their Crocs. With other 1,000 Jibbitz available, the potential for personalization was nearly endless.
Personalization worked wonders for Crocs. The company increased their revenue by 124%, from $75 million in 2006 to $168 million in 2007. While the company seemed to be on top of the world, a wrench was thrown into the works: the 2008 crisis.
The 2008 Crisis
The 2008 crisis was an extremely difficult time for many companies — and Crocs was not exempt from hardship. Unfortunately for them, the financial crisis meant that consumers were saving as much money as possible and frivolous purchases were cut to a minimum. In turn, this meant that Crocs was faced with a mountain of unsold shoes. After record-sales in 2007, the company found itself dealing with a $185 million loss in 2008, sending the company into a tailspin. The stock plummeted from ~$67 to just ~$1,10 in less than a year.
As if things couldn’t get any worse, their financial difficulties drew shareholder lawsuits and auditors who said Crocs might not be able to pay off its debts. Desperate for a change, the company appointed John Duerden, a turnaround expert who used to run Reebok, as CEO. What followed was a masterclass in company turnarounds.
Stabilizing the Company
Arriving at the helm of the sinking ship in March of 2009, Duerden was on a mission to bring the company back to profitability. How? By executing a classic turnaround strategy perfectly: cut costs and focus on profitability.
In order to cut costs, Duerden closed factories, cut nearly a third of the company’s workforce and got rid of excess inventory. The turn-around specialist also worked to increased retail sales and Internet sales in order to maintain their margins. Additionally, Duerden consolidated warehouse space to cut costs and worked to sure up the company’s wholesale channel.
Focusing on Profitability
Beyond cost-cutting, Duerden also implemented a strategy of focus. In the anticipation of their shoes becoming out-of-style, Crocs had begun developing a range of complementary products such as lines of apparel and high-end women’s shoes. However, these products were unprofitable and only served to dilute the brand image. Instead, Duerden wanted to stick to products that were “still recognizable as Crocs” to clearly focus the brand image. As a result, he cut all unprofitable product lines, refocused the brand, and re-asserted the core values as well as its growth possibilities.
Musical CEO Chairs
Having managed to stabilize the company, John Duerden stepped down as CEO in March of 2010 after a brief year and a half. John McCarvel, a long-time Crocs executive, replaced the turnaround expert. What followed was years of stagnation and inability to reach profitability. Moreover, the company played musical chairs with their CEOs. After McCarvel stepped down in May of 2014, Andrew Rees was named President and assumed the responsibilities of the CEO while the company searched for a replacement. During this time, Rees quickly put together a restructuring plan that saw 180 jobs eliminated, 75-100 stores close, and another round of scrapping underperforming lines. During the restructuring, roughly 30-40% of the styles were cut. Soon enough however, a replacement CEO was found. In early 2015, Greg Ribatt was appointed CEO of Crocs, a position he kept until 2017. In June 2017, Andrew Rees was appointed CEO, a position which he still holds as of writing this article. In full control of the company and with years of stagnation behind him, Rees could now execute his vision and launch an aggressive growth strategy: it was time for a comeback.
To say that Crocs had an impressive comeback in the late 2010s would be an understatement. However, it’s important to note that it was by no means an easy comeback. In 2018, Rees announced that Crocs would close all of its manufacturing facilities and 160 of its retail stores. To add salt to injury, the CFO of Crocs resigned that same year. If this brand was going to be saved, Rees would need to implement a serious comeback strategy.
Instead of sticking with the strategies that had worked in the past, Rees looked to his consumers. He was aware that consumers were tired of the unchanged, no-frills design. Although there were infinite personalization opportunities, the shoes lost their appeal and had faded in the eyes of the public. To comeback, the company would need to become popular again.
To become popular, the company had to focus. Virality and popularity can only be achieved if consumers immediately recognize your brand and understand what it sells. With this in mind, Crocs focused on two elements: “clog relevance and sandal awareness”. That is, Crocs wanted everyone to know that they sold two products: clogs and sandals, and the company wanted to become relevant again.
Unfortunately for Crocs, the company had completely lost its relevance. Therefore, to become relevant again, the company would effectively have to start from scratch. This is precisely where the genius of Rees shines through.
How to Become Relevant (again)
Crocs recognized that targeting their traditional customers, i.e. the generation that had grown up with Crocs, was not a significant growth lever. Instead, in order to grow, the company had to target today’s young generation — Gen Z. Gen Z is the generation that spend time scrolling on Instagram, TikTok, and that is heavily influenced by pop culture and big brands. Beyond going to a new market, Crocs recognized that Gen Z has tremendous influence among their social circles and over their parents. That is, the parents who had Crocs when they were children will be more compelled to purchase Crocs for their kids or even for themselves if they see their children eyeing them.
The only problem is that becoming relevant among today’s youth is by no means an easy feat. However, Rees had an excellent idea: they needed to go where their customers were. More specifically, if Crocs were to become relevant among the youth, they would need to meet them where they spend the most time: Instagram, TikTok and pop culture. As a result, Crocs began by releasing bold, funny, and easily-shareable versions of their clog. For example, they partnered with KFC and released a shoe covered in fried chicken. Similarly, they recognized the youth’s obsession with sneaker culture/streetwear and released an $850, 4-inch platform shoe in collaboration with Balenciaga. The shoe sold out in hours.
Why? Because it gets the clicks. Crocs observed their target customers and released shoes that would create buzz. When you see a Crocs with a heel, or a Crocs with chicken over it, you’re likely to share it with friends. At scale, people created TikToks, YouTube videos, blog articles and more on the topic. Everyone was discussing the clogs. Even music stars like Post Malone, in his song I’m Gonna Be, sang about the new Crocs: “…thousand dollar Crocs”. Crocs had successfully managed to be relevant among the youth.
The company continued their path to relevancy by leaning into the image of individuality, another desire of today’s youth. Crocs branded itself as a company that enabled individuals to express themselves, however crazy that self-expression may be. Thanks to their near infinite personalization capabilities, this marketing campaign worked wonders. In 2021, Crocs stated that they had partnered with more than two dozen artists, brands and creations through collaborations and license programs. Thus, alongside a boost from the pandemic, Crocs managed to become relevant again.
The Pandemic & Post-Pandemic
The pandemic could not have come at a better time for Crocs. It accelerated the already growing trend of comfort-minded, comfort-first footwear. Suddenly, everyone spent time at home and looked for comfortable shoes that they could wear, irregardless of how ugly they were. This was perfect for Crocs.
Not only had Crocs become relevant again but macro conditions had also helped accelerate a trend that worked in their favor. As a result, the stock doubled between January 2020 and December 2021. However, this explosion poses serious question as to how Crocs will perform after the pandemic.
Crocs’ Future in a Post-Pandemic World
Crocs’ stock is up roughly 20% from their pre-pandemic levels as of writing this article. Whether or not they will be able to maintain such levels depends entirely on their ability to maintain relevancy. I believe that Crocs will again face a similar problem as before: market saturation. Today’s youth is especially quick on trends and fads. That is, Crocs can become a fad overnight and lose much of the progress they’ve made over the last few years.
Their ability to maintain future top-line growth will depend on the company’s ability to create products their customers want. Like their comeback strategy, Crocs needs to continue to listen and perceive trends and nuances within their target demographic. By doing so and by continuing to design products with clear messaging and value proposition, they may be able to maintain relevancy for some time. However, they may also see their strategy of relevancy fade if they release too many “crazy” products. The public still needs to be surprised and cannot fall into a pattern of expectation when it comes to Crocs products. Additional popular verticals like NFTs and/or the metaverse could be explored for additional relevancy.
Only time will tell whether Crocs will manage to stay in the minds of their target customers. For now however, Rees’ strategy has paid off.