Sao Paulo Alpargatas S.A. Business Information, Profile, and History

Company Perspectives:

What we want to be: Be a world class company with desired brands of s port products, shoes, and industrial textiles.

History of Sao Paulo Alpargatas S.A.

Sao Paulo Alpargatas S.A., one of the largest apparel and textile fir ms in Brazil, is best known for its Havaiana thong sandal. This humbl e flip-flop, after long serving as simple light footwear in tropical Brazil, has improbably morphed into international high fashion. But t he company also turns out other kinds of footwear; sports clothing an d other sporting goods; and a range of industrial textiles. It also o perates a chain of retail clothing stores and is active in property d evelopment.

Footwear, Jeans, and Much More: 1907-79

The origin of Sao Paulo Alpargatas goes back to 1884, when S.A. F&aac ute;brica Argentina de Alpargatas was established in Buenos Aires by Juan Etchegaray, a Basque who had made a shoe with a canvas top and a sole of jute rope or twine, and Robert Fraser, a Scot whose family f irm, Douglas Fraser & Sons, made textile machinery. They teamed t o produce a version of the footwear known as an alpargata. This tradi tional Spanish light sandal, worn by peasants and laborers, had a sol e of tough fiber (usually hemp) woven to an upper of canvas cloth and was fastened about the ankle with cloth strings. Additional capital for the Argentine alpargata came from a Manchester firm, Ashworth &am p; Co., which was manufacturing cotton textiles.

Fraser and other British and Argentine investors brought this footwea r to Brazil in 1907, when they founded Sao Paulo Alpargatas. The Arge ntine company took a stake of nearly 9 percent in return for its priv ileges and patents. Production began the next year, and the factory a lso turned out oilcloth and canvas tarpaulins. These goods were prize d on coffee plantations, because laborers clad in the light footwear did not damage the beans on the ground, and the tarpaulins were used in the drying yards (and later for awnings). The company began sellin g shares on the Sao Paulo stock exchange in 1913.

The Wall Street stock market crash of 1929 and the resulting collapse of coffee prices in the worldwide economic crisis that followed forc ed the company to stop making alpargatas. It diversified its output w ith other types of footwear, such as other sandals, leather shoes, an d tennis shoes. During the 1940s the company began making alpargatas again and expanded its production of textiles to enter the clothing i ndustry. This output included denim for its first line of jeans, mark eted under the Rodeio label. In 1946 Robert M. Fraser, grandson of th e founder, sent Keith Bush to Sao Paulo for 15 days as an emissary fr om the Argentine firm. He stayed for 42 years, becoming president of the company in 1954. The enterprise was a pioneer in publicizing its products on the radio during this era.

SP Alpargatas introduced the Havaiana (Hawaiian) flip-flop in 1962. T his rubber-soled sandal, with a V-shaped strap separating the big toe from the others, quickly became ubiquitous in Brazil, thanks to its simplicity, suitability for a tropical climate, and low price. The co mpany, in 1965, introduced its Topeka brand of trousers. Two years la ter it introduced Madrigal bedspreads. In 1972 it launched a brand of trendy faded jeans called US Top. SP Alpargatas was the dominant Bra zilian jeans producer in the 1970s. It added Topper-brand sporting ar ticles in 1976 and purchased a competing company, Raihna Calça dos e Materiais Esportivos Ltda., in 1979. SP Alpargatas was Brazil's biggest textile and shoe manufacturer, with $385 million in net sales, in 1980, and factories turning out footwear, jeans, jackets, s hirts, bedspreads, denims, canvas, tarpaulins, and sporting goods.

Good Times, Then Tough Times: 1980-97

Parent Alpargatas S.A. parted company with SP Alpargatas in 1982, sel ling its shares. Thousands of individual shareholders now controlled more than 90 percent of the Brazilian enterprise's capital. It was th e tenth largest Brazilian-owned private group, with 21 factories in s ix states and 28,000 employees. That year the company bought Jeanerat ion, a six-year-old brand of jeans and shirts, and opened a retail ch ain by that name. In 1983 SP Alpargatas introduced Top Plus, a more e xpensive jeans line, and Samba, another footwear brand. The company, in 1987, began manufacturing Arrow shirts under license. Because of i ts superior variation of sleeve lengths and collar sizes, Arrow enjoy ed a 10 percent share of the dress-shirt market. Alpargatas also held the Brazil license for Nike footwear from 1987 to 1994.

With revenue of 31.2 billion cruzados ($433 million) and 30,000 e mployees, SP Alpargatas was still Brazil's biggest textile conglomera te in 1987. The following year Diego Jorge Bush succeeded his father as the company's president. Forty-six percent of the common shares we re still owned by 8,000 individual stockholders, but two big blocks o f shares were held by the Brasmotor (22.1 percent), and Camargo Corr& ecirc;a (19.5 percent) industrial groups. The two, each well represen ted on the board of directors, eyed each other uneasily but agreed no t to raise their respective stakes in the company and seek control.

SP Alpargatas was still the leading manufacturer of textiles and read y-made clothing in 1991, but this sector had experienced a 10 percent drop in revenue because of the recession that had gripped Brazil for two years. Indeed, in 1991 the company suffered its first loss in 55 years. Under the impact of the looming economic crisis, Alpargatas, in 1989, had changed its business philosophy, which had always been t o turn out more goods, at lower prices, of the products in which it s pecialized. Some eight factories were closed in 1990 and 1991, and 14 ,000 employees dismissed. Much of the work needed was outsourced to p lants in Argentina, Bolivia, Peru, and Uruguay. Clothing, the second largest division next to footwear, was the area most affected. Two of the company's six clothing factories were sold, and the number of it ems manufactured was reduced by more than half. However, some new lin es were added. In 1991, for example, Alpargatas began manufacturing P olo/Ralph Lauren shirts under license, and the following year it bega n doing the same for Van Heusen. This was in keeping with the firm's new philosophy: to seek products with major brand recognition. It int ended to become more a service than a manufacturing company, concentr ating on marketing and on supervising the logistics of distribution.

In spite of these measures, SP Alpargatas suffered catastrophic resul ts in 1992, losing $84 million on flat revenues that were, in dol lar terms, less than half the total in 1986. Its share of the Brazili an jeans market was now only 6 percent, while its share of the footwe ar market had dropped from 70 percent in 1988 to 30 percent. The comp any's change in policy had not been bearing fruit. By abandoning corn er stores for shopping centers and other higher-end venues, Alpargata s had been yielding space to its competitors. Moreover, the hard-pres sed public had shown reluctance to pay higher prices for clothing suc h as the US Top line, which was now twice as expensive as similar jea ns. In response, Alpargatas cut costs further by outsourcing even int ernal areas such as corporate engineering, insurance, and a supermark et chain mounted for its employees. It thereby lowered its fixed cost s and its debt by almost half and was able to make money from 1993 to 1995. Another important decision was the joint venture initiated in 1994 to produce indigo denim fabric and twill with a rival textile fi rm, Santista Têxtil S.A. This seven-factory unit became the lar gest manufacturer of these products in Brazil and the third largest i n the world. In 1995 SP Alpargatas acquired the license to manufactur e and sell Timberland Co. sportswear, and the following year, a simil ar license for the products of Mizuno Corp., a leader in sandals, tar paulin, and sports shoes.

Camargo Corrêa had raised its stake in SP Alpargatas to about o ne-third by 1993. In January 1997, after Alpargatas had again lost mo ney, Camargo Corrêa joined with Banco Bradesco S.A., Brazil's b iggest privately owned bank, which now held Brasmotor's former share, to oust Bush as chief executive. He was succeeded by Fernando Tigre de Barros Rodrigues.

By this time SP Alpargatas had made a giant step toward recovery in u pgrading its familiar Havaiana sandal in 1994. A publicity campaign f eaturing young, attractive models introduced Havaianas Top, which cos t twice as much as the basic-sandal price (BRL 3, or about $1) an d sold in 13 colors. Sales of the flip-flop rose from 70 million in 1 993 to 105 million in 1999. A Brazilian advertising agency, Almap, la unched a highly successful television campaign that always featured a Brazilian celebrity in a comic situation involving a new pair of Hav aianas. By the end of the century Alpargatas had also introduced two lines that were twice as expensive as Havaianas Top: Fashion, a thick -soled model for women and girls, and Surf, a line for boys that had a wider sole and different colors.

When Tigre arrived at SP Alpargatas, he later told Eduardo Ferraz for the Brazilian business magazine Exame, "I saw the organizatio n was hierarchical and stagnant, and I doubted that it was possible t o change things. After two weeks I told my wife that my career was ov er." Unlike Bush, who had preferred to delegate authority to the comp any's three virtually autonomous divisions, Tigre involved himself in almost very phase of the organization: the product lines, the positi oning of the brands, export strategy, the politics of human resources . The Polo/Ralph Lauren, Arrow, and Fido Dido licensed operations wer e dropped, and the Jeaneration stores were sold, as were the firm's o perations in Argentina. Many executives were fired or demoted, and th ousands more workers were dismissed. Six of the 12 floors at headquar ters were rented out. Company business was reorganized into five divi sions: sports shoes, Havaianas, canvas and other textile coverings, r etail strategy, and Timberland shoes.

The Flip-Flop Fueling Profits: 1998-2005

SP Alpargatas returned to profitability in 1998 and stayed in the bla ck. It continued to turn out Rainha, Topper, and Mizuno sports footwe ar, articles, and clothing, Timberland footwear, and industrial texti les, including almost all Brazil's seat coverings for trucks. Meggash op was now the name of its retail store business. But it was the Hava iana that was attracting the world's attention. Some eight million pa irs were exported between 2000 and 2002.

Abroad, however, the Havaiana was being marketed as a high-end item. In the United States it was restricted to such chains as Marshall Fie ld's, Saks Fifth Avenue, Bergdorf Goodman, and Nordstrom, and the bet ter-class West Coast surf stores, where fashionistas paid as much as $160 for a customized pair festooned with Swarovski crystals. San dra Bullock was seen wearing Havaianas with an evening dress. Nicole Kidman, Julia Roberts, and Sting also sported the suddenly trendy fli p-flop, and supermodel Naomi Campbell bought dozens for her friends w henever she visited Brazil. In Paris, designer Jean-Paul Gaultier par aded his models down the runway in Havaianas for his summer show, and by mid 2003 jewel-encrusted versions, bearing labels such as Chanel and Gucci, were being marketed in 45 countries, including Japan, wher e Swarovski-crystal pairs sold for the equivalent of $236. H. Ste rn, a longtime Brazilian jeweler, offered the sandals with 18-karat g old-feather straps; the price ranged from $2,100 for this "simple " sandal to $17,000 for a pair with both gold feathers and diamon ds.

In January 2003 Camargo Corrêa raised its share of SP Alpargata s from 38.5 percent to 61.2 by purchasing Bradesco's stake in the ent erprise. In June of that year Alpargatas and Camargo Corrêa bou ght the 55 percent of Santista Têxtil held by Bradesco and the Bunge group, becoming its sole owners. With five plants in Brazil, tw o in Argentina, and one in Chile, Santista Têxtil was one of th e largest manufacturers of denim in the world. It ranked fourth in sa les among Brazilian clothing and textile companies, while Alpargatas ranked third. Alpargatas held 30.67 percent of Santista's shares in 2 004 and half of the voting capital.

SP Alpargatas sold 129.7 million pairs of Havaianas in 2004, 16 perce nt more than in 2003. This unit accounted for 43 percent of the compa ny's sales volume. The sports footwear, articles, and clothing brands Rainha, Topper, and Mizuno were placed under common management in 20 04. This business unit accounted for 35 percent of sales volume. The operation of the Meggashop stores and management of Timberland and it s associated Sete Léguas, Conga, and Samba brands was now unde r the business development unit, which accounted for 12 percent of co mpany sales. Alpargatas sold 20.2 million square meters of industrial textiles in 2004, accounting for 10 percent of sales volume. In addi tion, its principal wholly owned subsidiary, Amapoly Indústria e Comércio Ltda., was producing polyvinyl chloride and polyes ter laminates for use in the manufacture of a variety of fabrics.

Amapoly's products and Alpargatas's industrial textiles were being ma de in Manaus. Topper and Rainha sports shoes were being produced in N atal and Santa Rita. Havaiana and Samba sandals were being made in Ca mpina Grande. Soccer balls and Topper, Rainha, Mizuno, and Timberland shoes were being manufactured in Veranópolis. Vulcanized and injection-molded shoes were being produced in Mogi Mirim. Pouso Alegr e was the site of tennis and shoe development.

Counting its share of Santista, SP Alpargatas had gross sales of BRL 1.23 billion ($419.74 million, based on the average currency-exch ange rate) in 2004 and net income of BRL 93.82 million, or $32.02 million (although Santista lost a small amount). The company's own s ales came to BRL 1.08 billion ($368.6 million) and its net income to BRL 95.55 ($32.61 million). Export revenue accounted for 6 pe rcent of the total. The gross debt was BRL 64 million ($21.84 mil lion) at the end of the year.

Principal Subsidiaries: Amapoly Indústria y Comé rcio Ltda.

Principal Operating Units: Business Development; Industrial Te xtiles; Sandals; Sports Articles.

Principal Competitors: Cia. de Tecidos Norte de Minas--Cotemin as; Grendene S.A.; Vicunha Têxtil S.A.

Chronology

• Key Dates:
• 1907: Sao Paulo Alpargatas is founded by British and Argentine investors.
• 1962: SP Alpargatas introduces the Havaiana flip-flop, which q uickly becomes ubiquitous.
• 1972: Introduction of US Top helps make the company Brazil's d ominant jeans producer.
• 1980: SP Alpargatas is Brazil's leading shoe and textile manuf acturer.
• 1991: With the Brazilian economy in recession, SP Alpargatas s uffers its first loss in 55 years.
• 1992: The company's share of the jeans market falls to only 6 percent.
• 1994: By upgrading the Havaiana sandal, SP Alpargatas takes a giant step toward recovery.
• 1995-96:The company wins licenses to manufacture and sell Timberland and Mizuno products.
• 1998: After several years of mixed results, SP Alpargatas retu rns to the black and stays there.
• 2003: The company take a sizable stake in Santista Têxti l S.A., a large denim manufacturer.
• 2004: Havaianas account for 43 percent of the company's sales volume.