Chew on This

John McCarvel, CEO of Crocs, reveals how the brand has bounced back—bigger than ever at $1 billion in annual sales in 2011—and why the projection to double that hefty sales volume is in reach within five years. By Greg Dutter

Few brands trigger a stronger reaction than Crocs. A mere mention of the purveyor of those foam-like clogs in garish colors sends fashion bullies into a tizzy. They’re loud. They’re puffy. They’re goofy. And, many are convinced, they’re downright fugly.

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John McCarvel, CEO of Crocs

John McCarvel, CEO of Crocs

Few brands trigger a stronger reaction than Crocs. A mere mention of the purveyor of those foam-like clogs in garish colors sends fashion bullies into a tizzy. They’re loud. They’re puffy. They’re goofy. And, many are convinced, they’re downright fugly.

While those Cayman clogs—ground zero of the brand’s assault on fashion—are extremely lightweight and comfortable, not to mention they’re easy-on and easy-off and can be worn with or without socks and in and out of water, it’s still a brand millions of people love to loathe. But it’s also a brand millions of Americans, and millions more around the globe, love to wear. And now that Crocs has evolved beyond a one-silhouette phenomenon into a more complete brand that infuses its lightweight and comfortable DNA into a broad range of styles, the feeling inside the company’s Boulder, CO, HQ is night and day from a few years back, when the sky appeared to be falling as Crocs suffered a fashion backlash, its sell-in strategy blew up and the recession kicked in. It was, as CEO John McCarvel says, the perfect storm. The brand that rocketed to $850 million in sales in just three years had nearly run out of cash only two years later, teetering on being buried in fashion’s graveyard alongside leisure suits and fanny packs.

The rise, fall and subsequent resurrection of Crocs mirrors the trajectory of so many of those VH1 “Behind the Music” episodes. The meteoric rise to fame, fortune and excess, followed by the crash and burn that over-indulgence so commonly brings, and then the inevitable redemption and reunion tour. The ideal narrator of “Behind the Brand: The Crocs Saga” would be someone who has had a ringside seat for it all. That person is McCarvel.

Back in 1994, Ron Snyder, McCarvel’s former boss at Flextronics (a high-tech manufacturing firm), called asking for help in a new shoe venture he had gotten involved with during his semi-retirement. Snyder saw potential, but he also saw his investment going down the drain as the company lacked the experienced personnel necessary to turn a unique item into a global business. “Not a lot of other executives could reach out and put together that kind of team,” says McCarvel, who was managing a manufacturing plant in Singapore at the time. During that summer, he checked out a few Chinese factories for Snyder, who was looking to ramp up production for Crocs.

When McCarvel returned to the States for a family visit wearing a pair of butter-colored Caymans, his wife was the first—but surely not the last—to remark on the fashion faux pas he was making. “She took one look and said, ‘What the heck are those? That’s the ugliest pair of shoes that I have ever seen. Did you wear those on the plane?’” McCarvel confessed he did and, he noted, they were really comfortable. It didn’t matter, as she immediately advised him to never wear them outside of the house. But McCarvel did—and increasingly more often. The comfort and versatility, especially when he returned to Singapore, made the choice too easy. “It’s hot in Singapore with 90 percent humidity, so you gravitate toward anything comfortable and casual,” he explains. The shoes were ideal whenever McCarvel would watch his sons’ sporting events or after playing golf—they were easy to pack, easy to wear and easy to rinse off. “They were just so soft and comfortable that, after a while, I didn’t care about the ugly factor,” he confesses.

McCarvel was sold on Crocs and officially joined the company in November 2004 to manage its Asia region. It wasn’t long after when sales exploded. He cites Dillard’s picking up the brand as the flash point. Specifically, he says Alex Dillard saw them on a whitewater rafting trip on the Colorado River and was sold. “That really propelled Crocs from the independent boating stores into mainstream U.S. retailers,” McCarvel recalls. “And once it was a success at Dillard’s, Nordstrom and Macy’s wanted to have it and so on.”

McCarvel describes the brand’s ensuing salad days as wild. In the span of three years, production spiked up to 60 million pairs a year. The company could do no wrong during that period, making clogs as fast as it could sell them—and Crocs was willing to sell to anyone, anywhere. Along the way, Crocs became flush with cash and began acquiring companies. Some were fits and some, in hindsight, made little sense at all. Its at-once replenishment business model—one that broke the traditional rules of pre-booking footwear orders—became a risk-free buying rage for retailers that fed the ferocious appetite of consumers (but it would also plant the seeds of the brand’s ensuing crash in 2007). Another factor that would eventually work against Crocs had to do with its management team. The very high-tech, global business backgrounds that enabled the brand to grow so rapidly weren’t prepared for some of the unique challenges that would arise in the fashion business.

But let’s face it: When the party is raging, few people—especially rock stars and a good number of high-flying execs—look for warning signs that the good times might abruptly end. Making gobs of money hand over fist tends to blind mere mortal souls of such killjoy scenarios. “In the summer of 2007, there was no indication that there was going to be a falloff,” McCarvel confirms. “We were still seeing massive demand from department stores, sporting goods channels and mid-tier independents.” Then, as fast as Crocs rose to prominence, it all began to unravel. Let’s call it Act II of the Crocs saga.
In the ensuing interview, McCarvel candidly explains where Crocs screwed up, what needed to be fixed and how it has since gotten its mojo back to the point where he firmly believes it will see solid growth. “We have a good future ahead of us. We just have to continue to build on our product story,” he says. “Our biggest opportunity going forward is new consumers. There’s so much more to Crocs now: It’s still fun and comfortable but there are so many more styles to choose from.”

How did it all go wrong?
For starters, our at-once model went against the grain of all other major footwear brands that required orders to be put months in advance. Meanwhile, we were building products based on our trajectory of U.S. sales, which accounted for 70 percent of our volume at the time (today it’s 35 percent) and thinking the growth curve would continue. But our sales people didn’t do a good job in managing where product was being sold—like gas stations in Hawaii, where the Macy’s buyers were on vacation and didn’t enjoy seeing that. And the Nordstrom buyers didn’t like seeing it being discounted in Dick’s at the end of a season. All of a sudden, we had a huge channel conflict and, even though [President] Bush said we didn’t have a recession, it became very clear in 2008 that we were in one. Retailers started canceling orders and even returning product. Throw in the fact that gas went to $4 a gallon and people were getting laid off by the thousands, and it was clear that the country had a big financial problem. And there we were with approximately 27 million pairs of shoes in inventory and no place to sell them. We nearly ran out of cash in the early part of 2009 because we were placing these bets ahead of the curve. It was a real mess.

There were no warning signs that the crash was imminent?
Oh yeah, there were signs. We knew that we had to go from this clog and evolve into a brand. In fact, one of our board members would often warn that the clog would become 20 to 30 percent of our revenue at some point. We just didn’t know the trajectory of the curve at that time. And, to our defense, we were fighting a slew of knockoffs, which was costing us tens of millions of dollars. But Walmart didn’t care. To them, this was a fad—although we never said the “F” word at Crocs—and until our patents were upheld in court, they were going to make as much money as they could. It also didn’t help that there was nothing we thought we couldn’t do at the time. For example, we thought the brand strength was so great that we could do apparel. Well, we soon had warehouses full of apparel that we had to liquidate. We also acquired four companies during that growth span. There are only two left (Jibbitz and Ocean Minded). Bite has since been folded into our new Crocs golf collection, and You by Crocs is gone. We also acquired Fury, an ice hockey company, to put our material in the padding. That’s gone as well.

Was there ever a point where you thought of jumping ship?
Even in the worst days, when we almost ran out of cash, I never really felt that was the destiny for this brand. In fact, I remember plans being put together by our CFO at the time that predicted our sales would fall to $500 million and I told [interim CEO] John Duerden that it was just not where the brand was at. I think he was surprised when we didn’t fall as much as these doomsday people were projecting. It was like a scene from Chicken Little, where our finance people were running around projecting that the sky was falling according to the model. I suggested they get out of the office and talk to consumers to see if any of it verified.

You still believed.
In early 2008, I could have taken the money and walked. But I loved the brand and the people here. We have a unique culture and one with very little politics. It’s a lot of people who just want to have fun, build a brand and work together. And not many companies get to do what we do globally—and to do it in three channels (retail, ecommerce and wholesale). The other part was that I felt guilty of the mess that we had created. You look back on things—it’s always 20/20—and realize that we should have changed our at-once model, we shouldn’t have over-built this product, etc. But when you are in the midst of going from $0 to $850 million, you don’t have the time to address all of those things.

What needed to be done to turn Crocs around?
It required fixing the product line and having patience to go out and sell it. Along those lines, we began opening our own stores because no one else wanted to carry the brand. In fact, outlet stores became our saving grace. We were selling the old inventory at $10 to $12 a pair (making 20 to 30 percent return), and we were getting consumers to see all of the new products we offered. We began converting that inventory rapidly, from late 2008 through 2010, into cash. By that time, we had approximately 200 styles of shoes and more than 200 stores of our own globally, and our partners built another 200 to 300 stores in China, Southeast Asia and Europe. We started to see that the brand had a loyal following that was interested in far more than our clogs. We took styles into flats and wedges, as well as added new materials like canvas and leather. Those were big steps for us. Introducing sneakers was another big step—product that weighs 7 ounces and is super-comfortable. Just as with our new golf line, people never felt a golf shoe that lightweight and comfortable. And that’s what we want people to think about Crocs in general. We also needed to make course corrections people-wise. To that end, we hired a second-generation management team and now have great people in the respective regions running our business.

Crocs is back and bigger than ever, yet it’s a brand so many people still love to hate. Does that matter?
So what? One of the aspects that has always been true about Crocs is that it’s fun, innovative, colorful, a bit edgy and a bit different. Wouldn’t you rather be there? I think of great brands like New Balance, Saucony and Asics and then say to myself, “God, would I want to compete with Nike and Adidas all day?” Who does Crocs fight with? Who is our competitor today?

Who is it?
Is it Skechers? But they don’t even do Cali Gear anymore. So we get to offer great product at a great price, we get to build all sorts of innovative styles and we get to have a lot of fun in the process. Today, 65 percent of our revenue is from outside of the U.S. and we have a true global following. And we still have opportunities to grow in the U.S. via direct and wholesale.

What was the hardest aspect when things weren’t going well?
The hardest thing to do in business is lay people off. What makes it even worse is when you go through major restructuring and lay off people that you really respect. We closed a factory in Brazil that had great people and thought would be our foundation for building product in that market. We shut down our Canada factory, which is where the brand began building product. We laid off about 1,000 people in Mexico. We had Taiwanese partners that went from full tilt to 20 percent capacity. You feel like you let those people down. And there was the internal cultural damage—people didn’t trust each other. I’m not sure people even liked each other by that point. We needed to get the right people on the bus and it was not about what we were going to do first as much as who we would have do it. Once you have the right people, you can do great things. We had to rebuild that.

When did you start seeing what became a stellar year in 2011?
By 2009, we could start to feel internally that the tide had turned. Famous Footwear, who once made us sit in their lobby for hours in St. Louis to make the point that we had treated them badly, were giving us a look once again. And then DSW, Kohl’s and Shoe Carnival were giving us a chance. All of sudden, that mid-tier channel, where our target consumer shops, saw that there was a new management team in place that had gotten its act together and was offering good products. By the time we had our pre-book in late Q4 of that year, we knew that ’10 was going to be a great year. We bounced back and went from $645 million to $790 million in 2010. We knew that we would build off that success and ’11 would be great, and we think ’12 is going to be another solid year.

So retailers are indeed a forgiving bunch?
You break that trust with them and it takes time to repair those wounds. I think that most have since forgiven us. We have said that we are truly sorry and that it’s not the same group of people that they necessarily have worked with in the past. All we asked is that they give us a chance. Of course, when they see that we are successful with other retailers, they are more inclined to forgive. But we have had to earn back the trust of the buyers, and we’ve got to continue to work really hard at making them be successful. Because if you can’t do that, then you have a real problem.

Has there been pushback on the amount of company-owned stores?
David Campisi, former president of The Sports Authority, told me nine months ago that for us to have 200 stores across the country didn’t really create a big competitive issue. In fact, when he went into our Santa Monica store, that’s when he realized Crocs was back. The store was packed and people were walking out with bags full of shoes. It’s all about trying to create the right balance. For example, we create SMUs for Kohl’s, and we don’t sell the same product that we sell at competing retailers or in our own stores. Plus, we are creating brand halo—people walk into our stores and see 90 different styles of our shoes.

What is it about Crocs that has the ability to appeal to so many different cultures?
I give a lot of credit to Ron Snyder. In those formative days, we would talk a lot about the type of culture we wanted to create. One of the tenets was no politics. Along those lines, our regions have 70 percent of the decision-making power. They have say on how to merchandise and market the brand. The result is that we are a Japanese brand to the Japanese, the same for Australians and so on. Somebody in Boulder telling someone in China how to visually merchandise a store for its Golden Week celebration should never happen.

Is there a region that has more potential than others?
Last year, the U.S. region accounted for $350 million in sales and it was almost a 50-50 split between direct and wholesale. In ’07, with a limited product offering and a heavily wholesale-dominated business, sales were $550 million. So I still think the region with greatest potential to grow in pure dollars is here. Currently, 12 percent of consumers have figured out that we are no longer a clog company, and 46 percent of our revenue now comes from clogs. In addition, China continues with its methodical growth of about $20 to $30 million each year. And we had a really good year in Brazil in 2010 and 2011 was OK, but the market offers great growth for casual lifestyle product with its warm weather. We also have a huge opportunity in Europe. We just reset our management team there. The region’s sales used to be larger than Asia and now that region is 2.5 times larger, so I think Europe offers significant opportunity for us. And the Middle East will be a region where we expect to see $20 million to $40 million in sales growth this year. It’s another warm climate with a consumer base that seeks casual footwear.

Is the goal to evolve Crocs into a more traditional brand presentation at retail—on the shoe wall?
It depends. With certain partners, like Famous Footwear, you’ve got to be sold in a box. That’s how they interface with their consumers. In our stores, we are still heavily hung—probably 70 to 75 percent of our product still goes into self-service displays. But when we get into boots—products that are $60 to $80 at retail—your consumers expect a box. Even in our own stores, we have to add a little more sit-and-fit space.

Do you envision Crocs becoming a multi-billion-dollar brand?
We believe Crocs can continue to innovate and create spaces where the brand can play. Last fall, for example, we introduced a cobbler collection of clogs at a little higher price point ($45 to $60) that were comfortable, fun and a strong impulse buy. We also introduced translucent styles, the Chameleon (color-changing) line in kids’ and a sneaker collection. We believe we can build a lot of relevant offshoots using our unique brand DNA and design spin that will allow us to grow. We are getting into more doors and, within those doors, adding more SKUs. In ’09, Famous Footwear let us back in with 18 silhouettes, and then it grew to 35 the following year and then to 50. This year it’s going to be 80 styles in men’s, women’s and kids’ that they carry. That’s the kind of growth and confidence we like to see, and I think that is going to continue. If you combine all of our channels, it should drive 15 to 20 percent growth for the next three to five years. So, to answer your question, we think we can be a $2 billion brand over the next four to five years.

Are you a Shoe Dog now or still a high-tech guy at heart?
After working in high-tech for 25 years, there is still a part of me that misses the new gadget coming out. I guess men are more techy than footwear savvy. But I’ve learned a lot about shoes over the last seven years. It’s a fun industry, it moves fast from season to season and you see what sells right away. We often have internal bets on which collections will sell the best, and what you think is going to and what consumers actually buy are often two different things. During the design stage, you don’t know whether it is going to sell 1 million pairs, 50,000 or a couple of million. Obviously, no one thought we would have sold 120 million pairs of clogs five years ago. Actually, during our first-ever global sales meeting last May, I sat with the company founders, who were just dumbstruck by the big production the meeting was. I asked them if they ever thought, in their wildest dreams, that Crocs would turn out to be what it has become. The answer, of course, was no. But that’s the cool part: They didn’t think it ever would get to $1 billion, so where does it stop? There is no cap on what we can do.

Perhaps the founders wanted to come back to work?
Oh, heck no. They never really “worked” when they were here (laughs).

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