Footwear Industry Bangladesh - A Comparative Study

D Y N A M I C S O F T H E F O OT W E A R INDUSTRY OF BANGLADESH A C O M PA R ATI V E S T U D Y O N T H E B U S I N E S S M O D E L S O F F O O TW E A R C O M PA NI ES

Prepared for Mr. Sheikh Morshed Jahan Associate Professor Course Instructor: Bangladesh Studies (G201)

Prepared by Group 5, Section A, BBA 20th ZR-05 MD. Mazharul Islam ZR-08 Abashesh Biswas RH-09 Tashfia Rawnak Anika ZR-15 Fahmin Rahman RH-19 Fableeha Bushra Chowdhury RH-28 Syeda Shehtaz Hasib ZR-31 Nishadul Haque Nihal ZR-32 Rakib Khan ZR-39 Sabbir Hossen RH-48 Sadia Samira ZR-60 Sajeed Alam ZR-62 Ahnaf Ahmed

Institute of Business Administration University of Dhaka 24 June 2014

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June 24, 2014 Mr. Sheikh Morshed Jahan Course Instructor: G201 Bangladesh Studies Associate Professor Institute of Business Administration, University of Dhaka

Dear Sir, As commissioned under the term paper submission of your course, we are submitting the attached report titled Dynamics of the Footwear Industry of Bangladesh - A Comparative Study on the Business Models of Footwear Companies. The major areas of analysis in our report include a detailed analysis of six of the major footwear companies operating in Bangladesh (local and international) in terms of manufacturing, sourcing and retail ; an analysis of the export-oriented operations and marketing activities of these companies ; and some company-specific case studies.

In completion of this report, we would like to thank you for the opportunity to work on this assignment as it has helped us explore a key industry in our economy in terms of domestic consumption and international presence. We hope you find this report satisfactory. Sincerely, ______________________ ____________________

________________________

MD. Mazharul Islam ZR-05 Abashesh Biswas ZR-08 Tashfia Rawnak Anika RH-09 ___________________ _____________________________ _________________ Fahmin Rahman ZR-15 Fableeha Bushra Chowdhury RH-19 Sabbir Hossen ZR-39 _______________________ _______________ ________________ ________________ Syeda Shehtaz Hasib RH-28 Rakib Khan ZR-32 Sadia Samira RH-48 Sajeed Alam ZR-60 _______________________ _________________ Nishadul Haque Nihal ZR-31 Ahnaf Ahmed ZR-62

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Enclosure: Dynamics of the Footwear Industry of Bangladesh - A Comparative Study on the Business Model of Footwear Companies.

CONTENTS Executive Summary...............................................................................................6 1.

Introduction....................................................................................................7 1.1 Purpose........................................................................................................8 1.2 Objective of the Report..................................................................................8 1.3 Scope..........................................................................................................8 1.4 Limitations...................................................................................................9 1.5 Methodology.................................................................................................9

2. Overview of Footwear Industry in Bangladesh......................................................10 2.1 Local Scenario.............................................................................................10 2.2 Export Scenario...........................................................................................10 2.3 Industry Analysis.........................................................................................11 2.3.1 SWOT Analysis.......................................................................................11 2.3.2 Porter’s Five Forces Analysis....................................................................12 2.4 Case: Footwear Industry – The Next Big Thing................................................18 3. Bata...............................................................................................................20 3.1 Company Overview......................................................................................20 3.2 Value Chain Delivery....................................................................................21 3.3 Supplies.....................................................................................................21 3.3 Manufacturing.............................................................................................22 3.4 Distribution.................................................................................................23 3.5 Product Offerings.........................................................................................24 3.6 Bata’s Leadership Points...............................................................................24 3.4 Case: Bata’s Stronghold in the footwear industry of Bangladesh........................25 4. Apex Adelchi Footwear Limited...........................................................................28 4.1 Company Overview......................................................................................28 4.2 Manufacturing.............................................................................................28 4.3 Supplies.....................................................................................................28 4.4 Product Offerings.........................................................................................30 4.5 Distribution.................................................................................................31 4.6 Exports......................................................................................................33 4. Case: Why is Apex Failing to be the Market Leader in the Local Market?...............34 Page | 4

5. Arbana............................................................................................................37 5.1 Company Overview......................................................................................37 5.2 Supplies.....................................................................................................37 5.3 Manufacturing.............................................................................................37 5.4 Distribution, Retail Outlets and Exports..........................................................38 5.5 Product Portfolio..........................................................................................38 5.6 Case: An Architect of Footwear......................................................................38 6. Fortuna Leather Craft Ltd..................................................................................40 6.1 Company Profile..........................................................................................40 6.2 Supplies.....................................................................................................40 6.3 Manufacturing.............................................................................................41 6.4 Exports......................................................................................................41 6.5 Product Offerings.........................................................................................42 6.6 Retail Outlets..............................................................................................43 6.7 Case: Fortuna Leading Bangladesh’s Footwear Industry with Visionary Thinking. .43 7. Leatherex........................................................................................................46 7.1 Company Profile..........................................................................................46 7.2 Supplies.....................................................................................................47 7.3 Manufacturing.............................................................................................49 7.4 Distribution.................................................................................................49 7.5 Exports......................................................................................................50 7.6 Product Offerings.........................................................................................50 7.7 Retail Outlets..............................................................................................50 7.8 Case: Evolution of Leatherex- All the Right Moves............................................51 8.0 Bay Emporium...............................................................................................53 8.1 Company Profile..........................................................................................54 8.2 Supplies.....................................................................................................54 8.3 Manufacturing.............................................................................................54 8.4 Distribution.................................................................................................55 8.5 Exports......................................................................................................55 8.6 Product Offerings.........................................................................................55 8.7 Case: How Bay positioned itself in the market.................................................56 9.

Comparison of Business Models........................................................................57

Appendix A: Hazaribagh the Footwear Haven..........................................................59 Appendix B: Questionnaire for Organization Personnel..............................................61 References..........................................................................................................64

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EXECUTIVE SUMMARY The footwear industry of Bangladesh, due to its rapid growth in demand both in the local and global market, is now considered the next ready-made garments sector. With around 41% of the export earnings coming from the leather-based footwear industry in the fiscal year 2012-2013 (Export Promotion Bureau, 2013), it is not very surprising that entrepreneurs are entering this sector in great numbers. The low entry barrier and the high demand from the consumers, is only facilitating the new ventures, and the industry is well set to expand in the future. Footwear companies like Arbana Fortuna, Leatherex and Bay Emporium have entered the market in a time span of less than a decade. Consequently, the footwear industry has been experiencing an annual growth rate of 21% according to Leather Goods and Footwear Manufacturers and Exporters Association (LGFMEAB). When it comes to the local footwear market, Bata is still considered the “family brand” and most people believe it to be a local company because of its domestic approach. Starting its journey in 1962, this multinational company with outlets in over 90 countries, enjoys revenue of around 5 million a year. Following Bata’s lead, Apex started in the early 2000s with a view to take away a sizeable portion of Bata’s market share. Both the companies employ similar business strategies like offering a wide range of products to reap the benefits of price discrimination and reach out to a larger target market. In a time span of less than a decade, footwear companies like Arbana, Fortuna, Leatherex and Bay Emporium have entered the market with a different aim in mind. These companies chiefly produce leather footwear and other accessories. Their footwear is more customized, hence more differentiated, and cost more than Bata and Apex’s footwear. However, customers still tend to value these locally made creative products, and companies like Arbana, boasts their 100% hand crafted designs. Arbana also sells with its own brand name in Middle Eastern countries like Dubai. Vertical linkage in the latter group of companies is a common phenomenon. Backward and forward integration helps these companies coordinate the demands of the production Page | 6

line expansion, actively control production costs, reduce material lead time, and master production cycles to deliver value to its customers. Most of these companies have a zero or one level supply chain, hence, are able to offer their customers competitive prices and superior buying experience.

1.

INTRODUCTION

This term paper is prepared with an intention to meet partial requirement of the course Bangladesh Studies. The paper focuses on the dynamics of the footwear industry of Bangladesh. Government of Bangladesh has identified the Leather sector as one of the thrust sectors. Leather sector earns a substantial amount of foreign currency every year through export of leather and footwear. Footwear industry, which constitutes a significant portion of the leather industry, is now playing an important role in the global market. Leather processing is an old manufacturing sub-sector in Bangladesh with a long heritage of over six decades. Availability of indigenous raw material (hides and skins) facilitated the setting up of the industry in early 1940s in the then East Bengal. During Pakistan period (1947-1971), the industry was dominated by non-Bengali migrants from India, who had the knowledge and the know-how of leather processing industry. At that time, leather processing was limited to the production of wet blue leather (semiprocessed tanned leather) and the non-Bengali traders exported a large part of the produce to West Pakistan for further processing and production of leather goods. A few small tanning units belonged to Bengali entrepreneurs who processed leather mainly for the domestic market (Ali, 2011). After the independence of Bangladesh, the government took over the tannery industry abandoned by the departing non-Bengali entrepreneurs but had limited success in operating them under the public sector. Export of processed leather consisted almost entirely of wet blue leather till 1980-81. After 1981, a number of policy support measures aimed at raising the level of value addition in the industry provided incentive for new private investment in leather industry. The ban on export of wet blue leather in June 1990 led to the setting up of modern leather tanning units for the production of crust leather (tanned leather after further processing of wet blue leather) and finished leather and this was followed by new investment in leather goods industry, particularly leather footwear (International Monetary Fund, 2000). There are three broad components of the leather industry (i) Leather tanning (Bangladesh Small and Cottage Industry Corporation, BSIC Code, 1911), (ii) Leather Page | 7

footwear (BSIC Code 1921) and (iii) Other leather products such as handbags, carry bags, wallets, cases etc. (BSIC Code, 1912). According to Export Promotion Bureau, Leather footwear accounted for 41% of export earnings from leather and leather products in 2012-13, while the share of leather and other leather products were 39% and 20% respectively. Thus notwithstanding its small size, leather industry in Bangladesh seems to have undergone significant transformation during the past two decades from a low value addition tanning activity to an exporter of leather footwear and leather goods (Ahmad &Bakht, 2010).

1.1 PURPOSE This report was done to study the business models of some of the popular footwear companies in Bangladesh in order to understand the overall dynamics of the footwear industry by evaluating their value delivery processes and particular issues true for each of them.

1.2 OBJECTIVE OF THE REPORT Broad objective: To assess the current position and analyze the dynamics of the footwear industry of Bangladesh. Specific objectives: The specific objectives of this report entail the following    

The current position of footwear industry The value delivery process of the established brands Supply chain analysis of the industry Cases focusing on particular issues true to each of the companies Potential of the industry

1.3 SCOPE This study encompasses some notable names in the footwear industry of Bangladesh. Because the footwear industry is closely intertwined with the leather industry and products of the two are perceived to be substitutes, the report refers to both these industries in the discussions. Some of the companies studied for this report sells both leather and non-leather footwear, while other solely produce leather footwear, but since all these companies target the same or similar segments, the companies’ business models are comparable.

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1.4 LIMITATIONS Some restraints that were faced at the time of preparing the report are given below:  

The insufficiency of information acted as the main constraint of the study Time limitation created obstacles as some of the executives said they will only be



available after the deadline of this report Data collected from the secondary sources were often out dated, and possibly did



not paint the correct picture of the current footwear industry Organizations were reluctant to disclose sensitive information about their



business Only six of around fifty footwear names in the industry, were studied

1.5 METHODOLOGY For preparing this report, information was gathered from the following sources: 

Primary data: To collect inside information of the footwear industry, we have interviewed personnel from the major footwear companies including Bata, Apex, and Leatherex. Direct interviews with key informants through structured



questionnaire have contributed to the credibility of the report. Secondary data: Secondary data and information were collected from various concerned government and non-government organizations and a thorough review was held on their publications, studies, reports, journals, newspaper articles, books, and websites to make this study potential and consequential.

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2. OVERVIEW OF FOOTWEAR INDUSTRY IN BANGLADESH Bangladesh is set to emerge as the next manufacturing hub for the global footwear industry. The cheap labor is prompting top manufacturers to relocate their factories in the country. The good news is that a number of foreign investors as well as buyers have already shown interest in Bangladesh’s leather and footwear sector.

2.1 LOCAL SCENARIO Import dependency on brand footwear for both sexes has come down as local manufacturers are gradually replacing those, thanks to their world class quality and reasonable prices. Most sophisticated and high-end customers now prefer locally-made footwear over imported ones. Following the success of a few entrepreneurs around a decade ago, a number of new industrialists have come forward to take advantage of an emerging market in domestic footwear and thus succeeded in saving a substantial amount of hard earned foreign exchange. Top manufacturers including Apex Adelchi Footwear Ltd., Leatherex Footwear Industries Ltd., Bay Footwear, Jenny’s Shoes Ltd. and Fortuna Leather Crafts Ltd. are now market leaders for the country for such footwear. The local footwear industry is experiencing an annual growth rate of 21 percent, according to a spokesman from Leather Goods and Footwear Manufacturers and Exporters Association of Bangladesh (LGFMEAB). However, to continue the trend, the present level of growth is not only to be maintained; it also has to be taken to a still higher level, if Bangladesh is to match the success of its immediate competitor, Vietnam.

2.2 EXPORT SCENARIO Growth in exports is due to the low production cost in Bangladesh compared to its neighboring countries: China, India and Vietnam, who also have a very well entrenched leather and footwear export industry. Orders which earlier used to be given to China or India are now being handed out to footwear manufacturers in Bangladesh because they are able to produce low-priced but quality shoes, which have now found its way in to key Page | 10

markets in EU and Japan. Japan and Germany are now the biggest markets for Bangladeshi footwear but US buyers are increasingly showing interest in sourcing from Bangladesh. This growth in footwear exports has come as a blessing in disguise at a time when leather exports have fallen by a massive 18 percent in the period under review. Experts attribute the growth in footwear exports, thanks to machineries imported from Italy that is trusted for its quality output. In recessionary trends, high-priced products tend to register a negative growth, as consumers tend to shy away from them in preference for value for money items. In this scenario, it is a golden opportunity for the leather and footwear sector to increase its global market share by producing simply day-to-day footwear at affordable rates. Despite the high quality of local animal hides both in raw and finished form, Bangladesh was still trailing behind Vietnam and China in the export of footwear and other leather products in the European and other markets, but this scenario is quickly changing.

2.3 INDUSTRY ANALYSIS SWOT and Porter’s Five Forces tools have been used to analyze the situation of the footwear industry of Bangladesh.

2.3.1 SWOT ANALYSIS Strengths:     

Low labor cost Domestic manufacturing facilities are export oriented Standards and quality of products are high Strong vertical value chain linkage Industry well experienced in the production of footwear and well networked by



now Similar prices in among shops, hence high competition and better consumer experience

Weaknesses:   

No longer a High Priority Sector (HPS) Safety standards in the tanneries not met by smaller enterprises Environmental concerns are being raised Page | 11



Designs from

not

company

to

company

do

vary much

Opportunity: 

Shift of China to High-Tech industries leaves a Demand-Supply gap to be



conquered Consumers’ preference of local, high quality products, over cheap, Chinese and



Burmese imports Getting media attention and therefore attracting resources like capital, land and labor

Threat:  

Political unrest Volatility of the world economy and hence demand for footwear manufacture in

    

Bangladesh Maturity of the industry from infancy Government withdrawing aids gradually Threat of removal of international trading aids Vietnam excelling at productivity and low cost footwears Ongoing law suits against the leather cottages in Hazaribagh

2.3.2 PORTER’S FIVE FORCES ANALYSIS The Footwear Industry of Bangladesh was analyzed with the view point of Porter’s Five Forces Model. The analysis of the industry is given below :

ANALYSIS ON THE LEATHER FOOTWEAR INDUSTRY OFGLADES

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Force 1: Threat of New Entrants A factor that indicates that the likelihood of entrants coming into an industry and creating competition for existing companies is known as threat of new entrants. It is higher if there is an excessive profit to be earned or entrance barriers are lower. In Bangladesh the leading footwear companies are Bata, Apex Adelchi, Jenny’s Shoes, Landmark Footwear, Leatherex Footwear, Bay Emporium Footwear, Fortuna Shoes ltd etc. Among them Bata and Apex Adelchi are the organized retail manufacturer and distributor who can boast of sizeable market shares. However, the entrants of new companies can still be observed, which is due to low production cost, high quality, durability and attractive design of footwear from the countries like China, Thailand, India etc. The threat of new entry into an industry depends on

the barrier to entry that is present, coupled

with the reaction from existing competitors that the entrant can expect. The major sources of barrier to entry include-

 Economies of Scale: Economies of scale refers to declines in unit costs of a product as the absolute volume produced per period increases. New entrants in the leather footwear industry cannot easily take over the existing companies as the existing companies of Bangladesh have low production cost and is enjoying large economies of scale compared to its neighboring countries. So, the new entrants have to come in a large scale and risk strong reaction from existing firms or accept a cost disadvantage.  Product Differentiation: Product Differentiation means that established firms have brand identification and customer loyalties, which branch from past advertising, customer service, product differences, or simply being the first in the industry. The leather footwear industries of Bangladesh such as Bata, Apex are leading the market from the very beginning which has already created their brand

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name and customer loyalty. Thus new entrants have to invest a lot to build their own brand name.  Capital Requirements: They need to invest large financial resources in order to face the barriers to entry particularly if the capital is required for risky or unrecoverable up-front advertising or R&D. Capital may be necessary not only for production facility but also for covering start-up losses. The leather footwear industries currentlyhave lots of financial resources by which they can now even enter any new industries. Such as, Fortuna has already entered in to food industries named“ Fortuna Fried Chicken (FFC)”.  Access to Distribution Channels: It refers

to

the

access

to

favorable

locations, proprietary technology or proprietary production material inputs which increase the entry barriers and decrease the threat of entry. The more the existing companies have tied up with these things the more the tougher new entry will be. In this case, Bata, Apex and Bay footwear Ltd has their own secured distribution channels which are

barriers for the new entrants. So in this sector the

new entrants must have strong and secured distribution channels of their own products to enter and compete into the industry. O Force 2: Threats of Substitute Products Substitute products are those products that can perform the same function as the product of the industry. There are a lot of substitute products of leather footwear like footwear of Rexine, Plastic, Rubber, and Jute. These substitute products give a great competition to the footwear in many sectors. Such as-

 Buyers’ Choice of Substitute: Bangladesh is a country of middle class people. Here, most of the people are not willing to spend a huge amount of money for footwear. Leather

footwear

is

comparatively

more

expensive

than

other

substitute products like, rexine, plastic, etc. Rexine is a product which fulfills almost all there quirements of leather and it looks quite similar.

 Relative Price-Performance of Substitute: It refers to the cost-effectiveness of the substitute products. Alternative products that provide overall savings to the customers, without influencing the quality of the customer’s products or services. The substitute products of leather footwear like, rexine is comparatively less costly and also by buying rexine footwear, consumers can have a taste of leather. 

Number of Substitute Products Available in the Market : There are many types of footwear in the market but the major substitute of leather footwear is rexine,

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Plastic,Rubber, Fabric, Jute, etc. Major portion of customer from leather footwear are diverting to Rexine footwear because it looks quite similar to leather but is less expensive. Force 3: Intensity of Rivalry among Existing Competitors Rivalry among existing competitors takes the familiar form of jockeying for position by using tactics like price competition, advertising battles, product introduction and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. The leather footwear industry is thus facing such rivalry among existing competitors. Factors that increase competitive rivalry among existing firms include:



Numerous Competitors with Roughly Equal Size & Power: If there are more firms within an industry; there is an increased competition for the same customers and product resources. There is even greater competition if industry players are equal insize and power, as rivals compete for market dominance. It is seen that in the leather footwear industry, most of the companies from 109 firms are of equal size and power which increased competition for the same customers and product resources such as Bata, Apex, and Fortuna etc.



Slow Industry Growth: When an industry is growing rapidly, firms are able to increase profits because of the expanding industry. When growth slows down and industries reach the maturity stage of the industry lifecycle, competition increases to gain market share. This is an example for Bata which is leading the market from a very long time. It reached to maturity stage and now competes to gain market share. Apex is also reaching the same stage gradually.

 High Fixed or Shortage Costs: In industries where the fixed costs are high, firms will compete to gain the largest amount of market share possible to cover the fixed costs. This is what every firm is trying to reach the fixed costs and shortage its costs in the leather footwear industry.

 High Exit Barriers: When high exit barriers exist; firms will stay and compete in an industry longer than they would if no exit barriers existed. In leather footwear industries of Bangladesh exit barriers condition varies from company to company. For example Bata, Apex and other established existing companies cannot easily cross the barriers, considering the major sources such as specialized assets, fixed costs of exit strategy, interrelationships, emotional barriers, government and social restrictions. On the other hand exit barrier is low for those new firms entering into the industry.

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Force 4: Bargaining Power of Buyers Bargaining power of buyers mean the buyers/customers have little power to set the terms and conditions under which they will buy. Basically it is an advantage to consumers that comes from gathering together to put collective pressure on producers to lower prices or improve quality. Bargaining power of buyers in the leather footwear industry is increasing day by day as new footwear companies with optimistic future plan and changing trend and quality consciousness is increasing day by day. Individual consumers of leather products in this industry have much bargaining power in negotiating price concession or other favorable terms with seller, hence, the individual buyers mostly pay the seller’s posted price. People want durable shoes as well as modern designs, so to satisfy customers the companies have tokeep up with the trend as well. In our country Bata and Apex are the main footwear industry but the substitute products are many more. These substitutes are fulfilling the samedemands with some extra features. The entrance of foreign brands like Nike, Reebok does notmake the scenario easier. More international buyers are moving towards Bangladesh as it hascost competitiveness in terms of gas supply, cheap labor cost, skilled labor. As the number of sellers, both in local and international market, is growing, the bargaining power of buyers is being strong. Buyers are particularly powerful when-

 Buyers are Concentrated or Purchase Large Volumes Relative to Seller Sales: The leather footwear sellers are supplying footwear to a large number of consumers. Theconsumers who are fond of leather, always use or purchase leather footwear and alsoleather footwear are also use as a formal dress-up. In this scenario, the purchasers aremuch larger and so can exert pressure on the suppliers. 

The products Purchased from the Industry are Standard or Undifferentiated: Customer bargaining power is greatly increased when alternative suppliers are easy to find and competitors are played against each other. People can now easily evaluate which type of footwear is good for them and also they can compare prices by assessing the market or through Internet. This particularly happens when the footwear are not that much different from the others.

 Buyers Faces Few Switching Costs:The customers can easily switch to an alternativefootwear company because they do not have to have any disadvantage for

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switching.Anyone wearing footwear of BATA can easily switch to APEX at their convenience.

Force 5: Bargaining Power of Suppliers

Where very few products are chased by a large number of buyers there poses a bargaining power of supplier. In Bangladesh, there are many leather footwear industries. As we all know there are many steps needed to prepare the leather before manufacturing. This increases the production cost. Besides there are some other barrier like water effluent treatment plants delay in payment by the buyers, slow process in sanctioning funds by bankers, unauthorized labor absenteeism, poor quality of equipment’s, political condition and government restrictions. Sometimes it is harder to fight back with all these problems. As a result the price of the product either increases or become stable at previous price. On the other hand the substitute products, they do not have to face all these problems. They are independent to set the price at a lower rate and consumers find the substitute product with the same features with a lower cost, which grab the leather market customers and divert them to other substitute product market. The conditions making suppliers powerful are largely the inverse of those making buyers powerful. A supplier group is powerful if:

 The Supplier Groups Possess a Credible Threat of Forward Integration: It provides a check against the industry’s ability to improve the terms on which it purchases. The threat of forward integration by the suppliers is high as brand identity is not a critical issue in the leather footwear industry in many cases in Bangladesh.

 The Supplier Group’s Product is Differentiated or It has Built Up Switching Cost: Differentiation or switching costs cut off buyers’ options in playing one supplier against another. The bargaining power of supplier is moderate but the number of suppliers is huge. Moreover, the upcoming and other shoe companies buy in so much quantity that the suppliers have to satisfy them even if by increasing quality and by decreasing price. For Example Bata not only provide good quality at reasonable price but also it gives warranty for its products.

2.4 CASE: FOOTWEAR INDUSTRY – THE NEXT BIG THING

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“With Bangladesh having developed a strong position amongst European and US buyers, many countries are already having eager to evaluate the future potential of this country.”(Bangladesh Ready Made Garments Landscape: The Challenge of Growth) – with this statement in mind it can be said that Bangladesh is going through a booming phase where not only can it expand its RMG sector but also venture into new sectors to reach the big market. Currently Bangladesh exports leather, leather goods and footwear is valued at around $1 billion a year which is about only 0.05% of the global market. Some of the companies already export standard quality products which are highly appreciated by the export countries. As a result the potential for this sector to grab a large share in the global market is very promising. Some say that after RMG, Footwear Industry will be the next best thing for Bangladesh. Bangladesh RMG is the second largest exporter of RMG which is approximately 80% of the total export. But it is evident that the condition of the RMG sector has grabbed the attention of millions of people around the world and sadly their perception about Bangladesh RMG is somewhat negative especially after the Rana Plaza incident. “It has been evident for the policy makers that it will be difficult for us to move on to the next phase of Bangladesh’s economic progress without developing new industries.” Ifty Islam, Managing partner at AT Capital. This is where Footwear comes in. Some of the factors that will highly help this sector to grow is the availability of the elements, raw materials and cheap labor (high working age population). But the major drawback that is stopping this sector to flourish are the nonexistent environmental friendly tanneries.’ According to some analysts, Bangladesh will be able to earn at least $5 billion in exports from leather, leather goods and footwear in the next decade if it can properly address health, environment and compliance issues in the sector. The only solution to this is the relocation of the tanneries. This step will help

the

footwear

industry

to

go

through

a

boost.

The benefits that the footwear industry at the moment poses are immense. The benefits as a whole will be able to take the country to the next phase in the global market. Studies show that if the desired export amount is reached then the country will be able to increase domestic manufacturing output by 9.2 percent and agricultural output by 6.7 percent according to a 'simulation exercise' conducted by Khondker and M Abu Eusuf, a professor at the development studies department at DU. The reason of increase in agricultural units will be because of the future increase of the demand of livestock. Also Page | 18

according to this study it shows that approximately 4.4 million jobs will be created and this will lead to a high economic growth. The high potential of footwear industry has already been addresses to. Due to relocation Tannery owners require money and for this reason government is asked to take necessary steps to help the owners. First step could be long- term loans with single digit interest. Tannery owners also urged the government to provide long-term loans at single digit interest rates. In par with that the owners are also urged to maintain the standards from the beginning. Each tanneries also need proper equipment’s to increase quality and efficiency. A total of 127 tanneries out of 155 already submitted their factory layoutto Bangladesh Small and Cottage Industries Corporation (BSCIC), the implementing agency, of which 85 of them are approved. After approval these factories are subjected to loans from the government. If the footwear industry is given importance by solving problems from the core with a fresh start then the future of this industry will hold a strong position in the economy of Bangladesh.

3. BATA

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The Bata Shoe Organization was established in August 24, 1894 in Zlin, Czechoslovakia by Tomas Bata, along with his siblings Antonin and Anna. Although a new venture, the Bata family had been involved in eight generations of shoe making which spanned over three hundred years. The Bata business aimed at becoming one of the first modern shoe ‘manufacturers’, a team of stitching workers and shoemakers creating footwear not just for the local town, but also for distant retail merchants. This departure from the centuries-old tradition of the one-man cobbler’s workshop was a brand new concept, creating an entirely new industry. This industry has developed exponentially over the years and currently Bata operates in over 70 countries under three strategic business units: Bata Europe (based in Italy), Bata Emerging Market (Latin America, Africa and Asia Pacific) and Bata Protective (worldwide B2B Operations). Bata estimates that it serves more than 1 million customers per day, employing over 30,000 people, operates more than 5,000 retail stores, manages 27 production facilities and maintains a retail presence in over 90 countries. Although the company originated in Czechoslovakia, family migration to Canada has shifted the company heritage and culture to a Canada based company. The global headquarters of Bata are in Lausanne, Switzerland. Thomas G. Bata, grandson of Tomas Bata currently heads the organization and the Bata family still maintains a majority of company ownership.

3.1 COMPANY OVERVIEW

Bata started its operations in Bangladesh in 1962 and has grown to become the market leader in the local footwear industry. Bata Bangladesh is a public limited company, with a 51% to 49% share with the Bangladesh government. The company is also one of the largest tax–paying corporate bodies contributing Tk. 1.2 billion in 2009, which represents approximately 70% of tax paid by the entire footwear sector of Bangladesh. Currently Bata Bangladesh operates two manufacturing facilities, one in Tongi and the other in Dhamrai. With a production capacity of 110,000 pairs of shoes daily, the company also has a modern tannery facility with an output of 5 million square feet of leather annually. Annual shoe sales currently stand at slightly more than 30 million with a turnover for the year 2009 of Tk 5 billion.

The company also maintains a diverse brand portfolio with each brand catering to a specific consumer segment. These include: Bata, Ambassador by Bata, Bata Comfit, Dr. Scholl, Hush Puppies, Marie Claire, Nike, Bubblegummers, Sandak, Weinbrenner, B’first Page | 20

and Power. Based on local demand, personalized brands are also created such as Mocassino by Bata and the company is continually developing marketing intelligence to consolidate its market position.

3.2 VALUE CHAIN DELIVERY As a global organization, Bata maintains an extremely coordinated and efficient supply chain starting from sourcing to distribution and retailing. Along each horizon of the supply chain, the company continually adds value to the process involved, along with increasing the strategic fit between product responsiveness and cost efficiency.

The

value addition starts from the core values of Bata categorized as the Bata leadership points. Furthermore, each segment of the supply chain (sourcing, manufacturing, distribution and retailing) focuses on continuous value addition.

3.3 SUPPLIES Bata Bangladesh procures leather from two sources:  

Tannery facility at Hazaribagh Bata’s own modern tannery facility located at Dhamrai

About 20 to 30 per cent of raw materials are sourced from Bata’s Dhamrai facility. This accounts to about 5 million square feet of leather annually. Also, the specific tannery facility at Hazaribagh that Bata contracts with maintains an efficient delivery system of leather within 7 days of order. In the case of inventory management, Just-in-time inventory management practice is followed. Artificial leather, plastic and rubber materials are procured from foreign sources, mainly Thailand and China, on a contractual basis.

3.3 MANUFACTURING Bata Bangladesh has four different sources of manufacturing: own facilities, satellite facilities, outsourcing and imports. Page | 21

i. Own facilities: Bata Bangladesh has two factories, one in Tongi and the other in Dhamrai. The combined capacity of the factories is 110,000 shoes daily. All the rubber and related materials production and assembling is done in the Tongi factory, whereas, leather products are been manufactured in the Dhamrai factory. About 92% of all Bata products are produced in these two factories. These production facilities not only have state-of-the-art manufacturing equipment imported from Singapore and China, but they also maintain environmental safety through effluent treating plants (ETPs). ii. Satellite: There are some satellite production factories, which produce solely for Bata with the production facility of those factories set up by Bata Bangladesh itself. About 4% of footwear production is from satellite sources.

iii. Outsourcing: Bata Bangladesh outsources a very small part of its production to different small shoe industries mainly from the Dhaka region. The quality and the specification at these production facilities are ensured and strictly evaluated by the Bata technical team. The participation of outsourcing in the company’s business is 4%.

iv. Import: Bata imports part of its products, mainly the global flagship brands like Hush Puppies and Nike, to keep up with the market trend and demand. In spite of high import duties of around 101%, imports for such products are still conducted.

In terms of manufacturing efficiency, Bata Bangladesh uses ERP (Enterprise Resource Planning Software) Version 2002. ERP coordinates between resources and the marketing, finance, planning, strategy, design and merchandising departments.

3.4 DISTRIBUTION The distribution channel of Bata Bangladesh operates as follows: Page | 22

1. The physical distribution starts from sourcing the raw materials and delivering them to the production facilities at Tongi and Dhamrai. 2. From there, the manufactured shoes are sent to the CDC (Central Distribution Center) located in the Tongi factory. Product packaging is done at the Tongi facility. 3. After receiving the products, completing the packaging and allocating quantities based on the destination, the products are delivered from the CDC to the respective destinations via Bata’s own transportation vehicles. Bata has trucks, pickup vans and covered vans for transportation. The CDC gets the daily update and the last situation of retail stores. In case special orders are placed on demandable products, an area manager ensures the availability of the products into the specific stores through proper channeling. For instance, if products are needed within 24 hours it is usually informed to the area manager and based on the information, he/she informs distribution manager at CDC. The CDC then supplies the product lot to retail stores over the phone. Another way is to follow the inter-transfer system, which involves getting the products from a nearby store. There is a separate process for distributing to Bata’s own retail stores and to those of the wholesalers and dealers. An equally extensive network of depots and dealers supplements this extensive retail network.The goods for agencies and stores gone straight to the store headquarter and goods for others gone to the 13 depots around the country from where they collect the goods.Bata has 13 Wholesale depots covering Bangladesh. Under these depots 453 RWD (Registered Wholesale Dealers) and 670 DSP (Dealer Support Program) stores are operating.

In retail, Bata Bangladesh operates through a chain of exclusive own and franchise stores.Ithas a network of 265 retail outlets located strategically in different parts of the country at prime locations.70% of Bata’s sales are from its own retail outlets. Besides there is a network of about 500 exclusive wholesalers who service about 300 retail stores all over the country.This increases widespread availability of Bata products and increases efficiency in distribution and delivery of value to the end consumers.

3.5 PRODUCT OFFERINGS

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Product designs are mostly imported from regional Bata subsidiaries. However, Bata Bangladesh maintains a market intelligence wing to monitor demand patterns. In fact, one of the notable activities of the market intelligence include introduction of Mocassino by Bata, a range of loafers in order to meet the growing demand of loafers in Bangladesh. In terms of brands, Bata maintains brands in three broad categories: children, women and men. Following are some of the notable brands offered by Bata Bangladesh:         

B-first: shoes for school-going children Bubblegummers: shoes for children aged between 3 and 6 years North-Star: stylish and trendy canvas shoes and sneakers for teenagers Bata range of formal leather footwear for men Ambassador by Bata: a premium range of leather footwear for men Power: athletic shoes of the Bata Brand Marie Claire: shoes for women Dr. Scholl: comfortable premium shoes for men and women Hush Puppies: premium leather footwear for men

3.6 BATA’S LEADERSHIP POINTS In spite of maintaining operations in different economic and cultural environments globally, Bata maintains a consistent value chain delivery in all of its global operations. The common elements in this value chain delivery are coined as the Bata Leadership Points. These elements, according to the company are categorized as follows: 

The best product: Bata companies offer customers fresh, fashionable footwear and accessories, designed specifically for the needs of the local market. The shoes are made from quality materials. In Bangladesh, high quality leather from Bata’s own tannery and selected tanneries is used. Furthermore, even manufacturing equipment is state of the art and sourced from China and Singapore. Plastic and non-leather items for shoe manufacturing are imported from selective companies

in Thailand and Singapore. The best service: Across all horizons, Bata strives towards maintaining excellent consumer service. Sales representatives receive frequent training on customer satisfaction and product knowledge building. In fact, Bata follows a 5-step i. ii. iii.

iv.

customer policy for sales representatives. This includes the following steps: Welcome every customer. Ask him or her about the need. Show him or her three types of demanded product: - Customer’s own choices - Similarto that choice - Highest pricing product Try to add-on selling (Socks, shoe polishand leather rmade bag). Page | 24

v.

Thanking the customer to revisit. 

The best value and quality: Through the efficient sourcing and distribution of Bata products, cost and quality are firmly regulated. Bata maintains a Central Distribution Center (CDC), which regulates efficient delivery systems across the



300 outlets of Bata nationwide. The best locations: Bata stores are modern, attractive and located at convenient and prime locations. Furthermore, the company operates 265 retail outlets strategically located across the nation, and these are also segmented based on the customer demand: Bata Bazar, Bata Family Stores and Bata City Stores. The company also maintains franchising and wholesale dealership to increase product availability.

3.4 CASE: BATA’S STRONGHOLD IN THE FOOTWEAR INDUSTRY OF BANGLADESH It is rather impressive for Bata to remain the market leader in the footwear industry of Bangladesh for decades. Leather manufacture and exports have risen sharply and a growing number of footwear companies have established themselves in the marketplace. Namely, Apex, Jenny’s, Leatherex, Bay and Fortuna have sizable portions of the market share. There are also various independent shoe manufacturers due to the widespread availability of cheap leather and footwear material. These independent shoes can be further categorized in the price range of high to low, thus, catering to customers of all economic segments. Surprisingly, the nature of the footwear industry is very much dependent on the aesthetic appeal of the footwear, particularly for women. Furthermore, the industry is highly price sensitive, which leads customers to compromise quality (genuine leather) for better looking and affordable footwear. This has presented a host of challenges to Bata Bangladesh. However, with effective strategic planning

and

implementation, Bata Bangladesh has retained its market stronghold. As the market leader, Bata Bangladesh is already effectively positioned into the consumer mindsets as the family brand with high reliability, quality and convenience. Due to its affordable pricing, a diverse portfolio of brands to cater to a wide range of customers, and the Bata brand promise, it retains a market stronghold. In fact, Bata is widely perceived as a local brand despite its foreign roots, because of the heavy integration with the consumer culture of Bangladesh. Also, its diverse product portfolio ensures maximum reach to all sorts of target consumer segments in the footwear industry. Effective campaigns such as “First to Bata, then to school,” make the product a

Page | 25

definitive for school going students and in terms of quality; none dismiss the authenticity and craftsmanship of Bata footwear. In the case of catering to the aesthetic factor and appeal that drives footwear purchase decisions in consumers, Bata has a market intelligence wing, which analyzes consumer trends and market demographics. On the basis of that, the results are forwarded to the design and strategic divisions, which then decide what range of products to import and design. For instance, the increasing demand for loafers in Bangladesh has led to the introduction of Mocassino by Bata, Bata’s very own chain of loafers. When globally, the Converse All-Star shoes became a fashion icon among the youth, Bata introduced its own range of canvas shoes, North Star, to tackle competition. Also, with growing consumer purchasing power and demand for premium footwear, Bata has had immense success through the introduction of Hush Puppies. In fact, Hush Puppies also has its own retail outlets due to increasing demand for the brand. Bata also frequently introduces trade promotions and brings in new product designs to keep consumer inflow intact. One of the greatest successes of Bata has been its geographic reach. It is the first footwear company to have introduced wholesaling and dealership programs to allow franchising of the brand. A lot of outlets in the rural areas have thus been established by these franchisees, increasing the scope of market coverage of Bata, something which none of its competitors possess. Also, Bata is the only footwear company to conductthe segmentation of retail outlets according to profiles of different market segments and the introduction of novel concepts such as Bata City Stores. These selective outlets, in conjunction with other types of outlets such as Bata Bazar and Bata Family Stores, are adding a new level of consumer satisfaction. The City Stores incorporate spacious floor space allowing a comfortable shopping experience, modern interior décor enriched with novel shelving systems, fittings, fixtures and lighting that can be found in the large retail shops in the Far East and Europe. Overall, the company is not only building its brand by covering as many diverse consumer segments as possible and keeping up to the pace of consumer trends, it is also increasing accessibility to the brand. The segmentation of outlets has also led to marked success in brand coverage, which has provided it an immense competitive advantage over its biggest competitors, who have almost no commercial activity within Bangladesh outside the capital and Chittagong. Bata hence, continues to retain its stronghold over the Bangladesh footwear industry.

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4. APEX ADELCHI FOOTWEAR LIMITED Apex Adelchi Footwear limited one of the oldest footwear industries in Bangladesh. It starts its journey in January 04, 1990 as Apex Footwear limited; Later on in December 27, 2006 it changed its name in to Apex Adelchi Footwear Limited.

4.1 COMPANY OVERVIEW Apex Adelchi Footwear Limited is a fully export oriented company. Now-a-days it is leading manufacturer and exporter of leather footwear from Bangladesh to major shoe retailers in Western Europe, North America and Japan. AAFL has equity, technical and marketing participation from La Nuova Adelchi one of the largest footwear manufacturers of Italy. Page | 27

4.2 MANUFACTURING Apex Adelchi Footwear Bangladesh Ltd has total 304,545 square feet of factory area complied with Global Standards of Footwear Production and imported machinery from Germany, Italy and Taiwan. In the year 2012, Apex Adelchi Footwear Bangladesh Ltd utilized its 92.03% of the whole production capacity. It manufactures 5000 pairs of leather shoes everyday while its competitor Bata produces only 4000 pairs.

4.3 SUPPLIES Role of suppliers in the Competitive Strategy The level of efficiency and responsiveness the supply chain can achieve is affected by the sourcing decisions taken, which makes it crucial to the production process. Most of the leather is procured from Apex Tannery Ltd. to ensure best quality and increase responsiveness. When located within Dhaka City, Apex uses private carrier to deliver product from central distribution center (CDC) to Gallerie Apex. On the other hand if it is located outside of Dhaka city, it uses package carriers or rent transports from third party. For export, it also uses third party, like Cost and Freight Forwarding Agents, to achieve economies of scale. Purchasing Strategies A firm’s competitive advantage no longer depends solely on its competency in providing a competitive range of offerings. It also depends on the firm’s skill to establish superior purchasing strategies in complex inter- organizational settings of numerous suppliers. Firms are no longer able to develop major product or service innovations alone because of the dispersion of knowledge and technological resources driven by organizational specialization. In addition, the growing need for greater effectiveness to focus on its core competencies leads to the externalization of the activities to partners. Apex Adelchi Footwear maintains both single and multiple sourcing strategies. It looks for single sourcing strategies when it has only one supplier for each product and service. It seeks scale advantages through lower cost products in a dyadic relationship. Multiple sourcing strategies are adopted when the buyer systematically utilizes several suppliers for each product and service. Apex considers quality foremost here. Those who maintain quality gets most of the business from Apex.

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Apex Adelchi Footwear procures its raw materials from both local and foreign sources. It collects leather from Apex Tannery Ltd. It imports soles, line lather, stickers or ornaments, glue, shoelace, and yarn from China and India. It import directly from the manufacturers of raw materials who meets quality and its requirements. It also imports by using local third parties. In case of procurement of raw materials, it only focuses on the quality. It does not maintain partnering, relationship buying or collaborative network with its suppliers. It maintains transactional exchange through the following strategies:      

Single purchase Focus on quality One time purchasing event Significant purchase After sales experts Maintaining services

Quality is always prioritized, and Apex Adelchi Footwear is ready to procure leather from suppliers at a relatively higher cost if the high quality is assured. When suppliers maintain their reliability in ensuring high quality over a long time, then it repurchases from these suppliers for a longer duration. Apex Adelchi Footwear always maintains its relationship strategy through the following terms:      

Long term orientation Repetitive purchase Dyadic partner Diminishing price Win- win situation Research and development projects

Otherwise, it purchases from different suppliers in from time to time by direct bargaining. It maintains the following strategies here:      

Strategic procurement Key partner network Decreased no suppliers Better knowing of chosen suppliers Updated product versions Mutual knowledge transfer

It takes two months to get raw materials arrived its factory from any country since it was ordered. It uses both air and ocean for importing raw materials.

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Eid ul Adha provides a high amount of the leather used in the production of Apex Adelchi Footwear. Most of the leather used during the year is obtained during this period, and it is absolutely essential to utilize all the available resources in gathering leather from as many sources as possible.

4.4 PRODUCT OFFERINGS Apex Adelchi Footwear Bangladesh Ltd has a wide a range of collection of shoes / sandals available for selling. Currently, the company has around 2500 different types of designs of products at its disposal. This products are mainly classified into two categories; laced and without lace. There are some other types of designs and they are; Back Belt, Slippers, Sandal, and Sports. Apex Adelchi Footwear Bangladesh Ltd manufactures all of its leather products in Bangladesh. But the sports shoes are imported from China and India and then marketed here in Bangladesh under the Brand name. Apex Adelchi Footwear Bangladesh Ltd concentrates on producing various designs of leather products and they are listed below:     

Men’s dress and formals Men’s Casual Men’s Dress and Casual Boots Ladies’ Boots Men’s and Ladies Hand stitched Moccasins

In the recent times, Apex Adelchi Footwear Bangladesh Ltd is concentrating on designing new and innovative products. As a result, it has come up with a new athletic shoe named Aetrex Performance Footwear. This sports shoe is very comfortable and at the same time uses top class design performance using state-of-the-art technology and materials. Apex Adelchi Footwear Bangladesh Ltd designs its products based on the following categories;    

Category Category Category Category

“A”: The best “B”: Better “C”: Good “D”: Moderately good

Apex Adelchi Footwear Bangladesh Ltd also sells some high end footwear products representing the brand. Some of these products are; IT (Italian) Project, ID Shoe, Franco and HW (hardy worker).

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4.5 DISTRIBUTION Ordering System Gallerie Apex orders its required products to the Central Distribution Center (CDC), situated at Tejgoan in Dhaka City, by completing a Special Requirement Form. Store manager fill up this form mentioning the code of the product, quantity and other things. The order is made on a weekly basis and placed early enough to avoid running out of stock. This form is sent to CDC either by the sales force or a courier service. CDC accumulates several requirement forms of Gallerie Apex and sends it to the factory. The lead time varies from one month to two months depending on the situation and nature of the product. If the required products are available in the CDC or factory, the products are sent within a very short time. In order to digitize its process through electronic medium, Apex Adelchi Footwear is going to start internal online ordering system within a few days. Distribution System Apex Adelchi Footwear distributes its products to Gallerie Apex by using own distribution channels with in the Dhaka City. For distributing its products outside the Dhaka City it uses Courier services or rented truck. Its products come to CDC from the factory, and then they are delivered to Gallerie Apex from CDC. Distribution strategy Apex Adelchi Footwear follows selective and Intensive distribution. Selective Distribution: When a new product is introduced in the market, it first appears in the divisional outlet only. Intensive Distribution: If the new product best fits with the customer demand and if the sales growth of the new product is high enough in the divisional outlets, then Apex decides to go for intensive distribution. It then makes the product available in all the Gallerie Apex. Value Creation Stages in the Supply Chain When marketing to local consumers, a 2 level Marketing Channel is maintained. In the primary stage, value creation begins with new product development, which creates

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design and specifications for the product. Marketing and Sales generate demand by publicizing the customer priorities that the product will satisfy. Marketing and Sales also brings customer input back to new product development. Using these new product specifications, the manufacturing unit transforms inputs to outputs to create the product. On the first level, the Central Distribution Center delivers the product to various sales centers (Gallerie Apex) to make the product available to the customers. Gallerie Apex then displays the product and sells it to the customers. It also provides after sales services.

4.6 EXPORTS Apex Adelchi Footwear started exporting in 2000. Below is the list of the major countries where Apex Adelchi Footwear Bangladesh Ltd exports its products.         

Japan Germany Italy France Austria Scandinavian region and Switzerland Other EU countries USA Canada

On an average, 75% of its total revenue generated from export mainly to EU (Internatinal Leasing Securities Limited, 2013). Below is a graph representing export of Apex Adelchi Footwear Ltd.

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In the year 2008, Apex Adelchi Footwear Bangladesh Ltd exported shoes worth Bdt. 5.07 billion (Choudhury, 2010). The export of Apex Adelchi Footwear Bangladesh Ltd got a new dimension after the affiliation with the Italian footwear producer La Nuova Adelchi Footwear. The primary joint venture capital provided by La Nuova Adelchi Footwear was Bdt. 150 million. So, it is evident that the capital contribution was not that significant. But the main benefit of the affiliation was that Apex Adelchi Footwear Bangladesh Ltd got recognition in the European countries and its export has boosted since then. Apex Adelchi Footwear Bangladesh Ltd now designs its products using Italian product development & technology. At the very first year of operation (after the affiliation), the annual export was expected to be Bdt. 900 million and later on Bdt. 2 billion. Currently, Apex Adelchi Footwear Bangladesh Ltd is responsible for exporting almost two-third of the country’s whole footwear export.

4. CASE: WHY IS APEX FAILING TO BE THE MARKET LEADER IN THE LOCAL MARKET? Apex Adelchi Footwear started its business through exporting in the year 2000. As of now, it exports to Italy, Germany, Western Europe, Japan, and North America. It exports directly from its factory, and is the biggest footwear exporter of Bangladesh. Apex Adelchi Footwear is the market follower in the country market. It just follows the country market leader Bata Shoe Company and tries to achieve the equal market share that Bata holds. It has not set its sights on surpassing Bata in the local market yet. However, it maintains a strong foothold through more than 106 outlets all over the

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country, which makes it the second largest shoe retail chain after Bata. Its market share is growing fast along with the emerging middle income population of the country. Bata and Apex Adelchi, two of the country's leading shoe manufacturers and retailers, are set to intensify its battle for customers with both companies sharply increasing its number of stores. Comparisons between them are shown below:

Apex Adelchi Footwear Limited

Bata Shoe Company Limited

It has more than 106 retail outlets

It has 237 retail stores.

It plans to set up some 20 new retail It will set up 40 different stores this year 10 city outlets

stores, 11 super stores, 14 family stores and 5 franchise stores

It aims to cater to the footwear needs It caters to the demands of all income groups of the middle class to upper middle class in the urban and semi-urban areas across the country Its main objective is to provide It will focus on providing products within a price customers enough choices in a fairly range that is affordable for different types of narrow price range.

customers. It focuses on providing wider priceranged products than Apex Adelchi.

Its strategy is sustainable growth Its strategy is rapid expansion through delivering through

delivering

high

product products of all qualities

standards It wants to set up some complete Its biggest focus now is on the city and super family stores enabling its customers to stores have a pleasant shopping experience

Apex Adelchi Footwear Ltd

Bata Shoe Bangladesh

(in 1000s)

(in 1000s)

Revenue

5992.5

5273.2

Gross Profit

719.1

1821.6

Gross Margin

12%

35%

Net Profit

247.3

476 Page | 34

Net Margin

4%

9%

ROE

32%

53%

Source: Annual Reports From the above table, it can be observed that the annual net margin of Apex Adelchi Footwear Bangladesh Limited is much lower than its counterpart Bata, though its annual revenue is higher than that of Bata. All these issues are not letting the company to excel in the local market and need to be addressed if Apex is to come anywhere near the market leader, Bata.

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5. ARBANA When it comes to making Products, they make handmade shoes which are made out of 100% leather. Moreover, as mentioned earlier, their shoes are contemporary and fashionable. They basically make Footwear for both Men and Women. Apart from producing shoes, Arbana also makes Belt, Office Bag, Women’s Bag, Money bag and Key ring.

5.1 COMPANY OVERVIEW

Arbana is a contemporary footwear brand. Their mission is to develop new footwear architecture in Bangladesh. It was founded in 8th May 2011 as a local Footwear style brand. Its image stands for freshness, spontaneity and youthfulness. Its customers are modern men and women who enjoy underlining their personality with a contemporary look. It is a local brand with global attitude. They make rigorous testing for better design, better comfort and not to forget better quality. They aim for perfection, thereby, assuring

the

best

for

their

customers.

They

use

generations

of

accumulated

craftsmanship, combined with today’s modern techniques to create individual shoes with an exclusive "Arbana" personality. That is why they term themselves as “Footwear Thinkers”.

5.2 SUPPLIES Arbana buys the small components for shoes like insole, cushion material, buckles, outsole and other tools and materials like glue, sturdy threads and cutting tools from Puran Dhaka. The suppliers of that region normally charge lower prices for these raw materials which is cost effective for Arbana.

5.3 MANUFACTURING They have their own manufacturing department and tannery in Hajaribagh, Puran Dhaka. They say it cost them more if they buy tannery from suppliers. So they set up their own tannery to save cost and moreover this backward integration has also made it Page | 36

more accessible to supply leather to their manufacturing department on time without any delay in the production process.

All the shoes in the manufacturing department are handmade, as mentioned earlier. Thus, the process is labor intensive. Bangladesh being a developing country has abundant cheap labor supply which is a major contribution for Arbana, mentioned one of the employees of the company.

5.4 DISTRIBUTION, RETAIL OUTLETS AND EXPORTS Arbana makes its own shoes and distribute them to its own retail outlets. However, they also sell its shoes to Ecstasy and Doors. They have a very good relationship with these companies which help Arbana sustain a healthy supply of their products. Arbana has many retail outlets in some of the happening zones in Dhaka city. The shopping malls which the company has chosen are Simanto Square, Dhanmondi-2; Elephant Road; Plaza AR, Sobhan bagh, Dhanmondi-19; RAK Tower, Uttora, Sector-3 and many more. They market in these malls so that they can better capture their target customers and tackle their competitors effectively. Arbana is not only local; it is also successful in being global for its ultra sophisticated shoes. Currently it exports its product to Dubai, Malaysia and Italy with its own brand name.

5.5 PRODUCT PORTFOLIO Shoes of Arbana are self designed by the Managing Director of the company. He is an architect who gives voguish designs and chic styles to the looks of different varieties of shoes. It is asserted that their footwear is fashionable and all the designs are up-to-date. Overall, Arbana has succeeded in becoming a well established fashionable footwear company which sells its produce to men and women not only of Bangladesh, but also of other countries. It is doing its business well and hopes to prosper much more in the future.

5.6 CASE: AN ARCHITECT OF FOOTWEAR Page | 37

The footwear industry of Bangladesh has been traditionally being dominated by Bata in almost all customer segments, as the market leader; while organizations like Apex as the market challenger, and Bay Emporium, Jenny’s, Zeil’s and Leatherex as market followers are continuously fighting to retain and increase their existing market share. All of them have significant export revenue to back up their reputation and local sales. They have their unique and strong supply and value addition chain. Also, there are lots of other local manufacturers who are operating the market not only as suppliers of the big brands, but also with their small-medium and meager number of outlets. Therefore, the footwear industry of Bangladesh is quite competitive; and successful emergence of a new player in this field is surely going to be challenging. Arbana emerged in this saturated competition on May 8, 2011 with their mission is to “Develop new footwear architecture in Bangladesh”. Founded by Mr. Mahim Rashid, an architect of refined taste, the Arbana staffs proudly introduces themselves as the “Footwear Thinkers”. Arbana is a local brand with global attitude. Besides operating in the local market, it exports to a few countries like Dubai, Malaysia and Italy. Its customers are modern men and women of the medium and upper income class who enjoy underlining their personality with a contemporary look that combines freshness, spontaneity and youthfulness. They make footwear for both Men and Women. Apart from producing shoes, Arbana also makes Belt, Office Bag, Woman Bag, Money bag and Key ring. The company boasts about its footwear which is 100% leather made and they exhibit the traditional line of hand-crafted footwear. This gives the customers a sense of superior quality and artistic sophistication. This feature has been very effective as Arbana’s point of difference for competitive advantage. People who purchase the products of Arbana get an antique feeling of class. This makes them consider Arbana product to be worth the money spent and repeat purchase. Therefore, keeping the supply wheel rotating and maintaining the quality are what keep Arbana is business. Although Arbana hasn’t yet been able to capture enough market shares to significantly challenge the likes of Bata, Apex or Bay, it has successfully achieved a good number of loyal customers with its unique design, promised comfort and quality. The aristocracy and uniqueness of the footwear design has the point of parity for Arbana from the very beginning. All the designs are the creation of the Managing Director Mr. Mahim Rashid, who himself is an architect and renders the footwear with artistic touch and at the same time trendy as the go.

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6. FORTUNA LEATHER CRAFT LTD Fortuna shoes is a sister concern of Fortuna Bangladesh Group which was established in 1984. It is a major industrial conglomerate in Bangladesh and its strategic business units sell products ranging from fast food items to footwear and IT services. Fortuna initially started its venture as a garments unit with only 140 sewing machines and 250 workers in its own 120,000 square feet facility. The footwear unit was later established in 2010, with the vision of Fayaz Taher (CEO of Fortuna) to become one of the leading footwear exporters in Asia. A company that started with only 140 sewing machines and over 2,000 workers in its 120,000 square feet factory facility, is now one of the leading footwear exporters in Bangladesh. It has also attracted domestic consumers with its world-class shoes and other accessories which are made from quality leather sourced from Fortuna’s own tannery in Hazaribagh.

6.1 COMPANY PROFILE The Fortuna group started with the vision of M. Abu Taher, who has years of experience in the industrial sector. The management team of Fortuna, has over 40 years of entrepreneurial business experience both in the domestic and international market. The group is a privately held company that is open for strategic partnerships and joint ventures for its business.

Fortuna footwear’s mission is to provide the optimal blend in style, quality, and affordability in footwear and accessories. The company sells shoes, leather bags, etc, in its 20 or so retail outlets around Bangladesh. It also exports to countries in European Union and United States. It has a cutting edge web portal installed by Infrablue Technology. an award winning IT division of Fortuna group that started in 2008.

6.2 SUPPLIES

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Fortuna has its own tannery unit which sells to both its footwear unit and other clients. Ruma Leather Industries Ltd was bought in 1991 by the Fortuna group as a strategic unit. The tannery is located in Hazaribagh on a three quarter acre plot of land. It has state-of-the art equipment in its tannery with a capacity of producing 500,000 square feet of finished leather per month. Ruma is targeted to reach $12 million in exports, annually, by leveraging its experience technicians and management team. Other materials are sourced from China, India and Taiwan.

6.3 MANUFACTURING Fortuna Park is the manufacturing department of Fortuna shoes. It is located in Kunia, Gazipur and was set up in 2010. The manufacturing plant, which required an initial investment of Tk 56 crore to set up, has a capacity to produce around 6000 pairs of shoes and 500 bags per There are four lasting lines - the 40,000 square feet factory in unit 1 and 30,000 square feet in unit 2. The factory produces footwear products mainly for the international market, but also manufactures shoes and accessories for the domestic market. Fortuna also has its own shoe moulding factory. The moulding factory sources plastic from China and India, and ensures the shoes are perfectly shaped.

6.4 EXPORTS Fortuna closed down its garments unit in 2009. By opening Fortuna Park the next year in 2010 and establishing Bangladesh’s first shoe mould manufacturing factory, Fortuna entered the international footwear industry. It started with the aim to earn around Tk 200 crore in foreign currency a year. The reason Fortuna closed down its garments manufacturing plant in 2009, was because of the anticipated growth in the shoe and leather industry. Even though the demand for fashionable and high quality leather shoes had declined in the international market due to the recession at the time, there was still an opportunity to leverage the demand for simple but necessary shoe products. At the time, shoe industry was in the early stages that is similar to the early days of the readymade garment industry. The CEO Fayaz Taher, marked this opportunity and Page | 40

quickly grasped it. Now, Fortuna is one of

the leading footwear exporters in

Bangladesh.

As China’s labor cost is increasing, foreign buyers are looking for other places where they can outsource their manufacturing department. Countries like China and India are unable to produce high quality leather shoes at a low-cost. Foreign buyers are nowadays seen shifting their manufacturing strategy and locally producing the shoes. This gives Bangladesh the potential to meet the demand of foreign buyers. With its own leather manufacturing department, Ruma Leather Industries Ltd, Fortuna is vertically integrated and is able to enjoy a competitive edge in sourcing its supplies. The company also partners up with foreign companies. For instance, it had teamed up with a chinese company to establish the country’s first shoe mould factory. This sets Fortuna apart from other footwear companies, most of which uses wooden moulds that are not as accurate. In addition, the company is in a joint venture with a Spanish company to make outsoles. It collects over 100 different outsole styles from Spanish sources. Fortuna also has state-of-the art management team, and undertakes public relation move to promote its factory compliance, environmental standards and ethical work culture. Buyers usually inspect Fortuna’s plant facilities and retail outlets before placing order on the company. Fortuna has worked with foreign companies like H&M, Melillo and Anto Harness. It makes ballerina shoes, boots, sandals, etc for ladies, men and children to meet the orders set by its foreign buyers.

6.5 PRODUCT OFFERINGS The Fortuna shoe factory is overseen by foreign personnels which includes Chinese professionals who look after the technical and production side. An American fashion designer supervises the designing department to help Fortuna stay at par with its foreign client’s demands. Following are the types of shoes Fortuna sells -

● Women’s Shoes: Fortuna produces heels and flats for women. Most of these footwear are made of leather and are have a fusion of both local and foreign designs. Its prices range from around 600 Tk to around 3000 Tk for women’s footwear in the local markets. Page | 41

● Men’s Shoes: Fortuna has a wider range of men’s shoes than women’s. It sells converse, sandals, shoes, EVA sandals, etc, for men. It terms its men’s shoes as “intelligent, confident, stylish, creative, relaxed, driven, modern and out of the box”. Shoes for men has a higher average cost with minimum price starting from around ● Kid’s Shoes: Alongside selling women and men’s designs, Fortuna also specializes in producing kids’ shoes. Kids’ shoes range from lightweight to medium weight to provide extra support for the kids. ● Other Items: Fortuna also sells bags, wallets and other leather accessories.

6.6 RETAIL OUTLETS Fortuna is a brick and click type company. It has both physical outlets and online marketplace for its shoes. ● Retail Shop: It has around 20 retail outlets around Bangladesh, 15 of which are in Dhaka, others are located in Sylhet, Tangail and Kushtia. Over the years, consumers are increasingly being attracted to the local designer shoe stores like Fortuna. With its attractive store design, and quality assurance by its shopkeepers, Fortuna’s domestic sales have been growing ever since its inception in 2010. ● Online Shop: In response to the growing footwear demand, Fortuna has opened an online marketplace to make the buying experience more convenient for its consumers. Its e-store gives home delivery services and packages are generally dispatched within 2 days after receipt of payment and are shipped via USP with tracking. Consumers are hence, able to track their package online. Consumers are also given the option of replacing their bought product within three days of payment.

6.7 CASE: FORTUNA LEADING BANGLADESH’S FOOTWEAR INDUSTRY WITH VISIONARY THINKING The chief executive officer of Fortuna, Fayaz Taher is set out to promote Bangladesh as the Next Footwear Destination in the US Business Delegation trip. Page | 42

His vision is to make Fortuna the best footwear manufacturer in Asia. It is a challenge Mr Fayaz has undertaken but through continuous improvement, and with one of the best management teams in Bangladesh, this visionary CEO is hopeful about reaching this goal. “Sometimes people look at me and say - why don’t you just be the best in Bangladesh?” remarked Mr Fayaz on how people are resistant to setting high goals. “But I say, why would I do that? Why can’t I be the best in Asia?” he continued explaining how he would not let negative thinking keep Fortuna from becoming the best in Asia. Back in 2009, it was Mr Fayaz who sensed the potential of the footwear industry of Bangladesh. “We wanted to be a part of the next boom and opportunity and we feel footwear is the next one”, explained Mr Fayaz. Chinese manufacturers are now producing shoes at a higher cost because of the increase in labor wages. Many of the foreign buyers, as a consequence, are shifting from an outsourcing strategy and are now producing locally. But if Bangladesh is able to leverage its vast leather industry coupled with cheap labor and high-tech imported machinery, then it can well be the next footwear destination in the international market. The ready made garments industry, which started to boom in the 1980s, was able to put Bangladesh at a recognizable position in the foreign market. With this in mind, Mr Fayaz believes, that footwear industry will have an upper hand due to the country’s reputation of producing quality products for its foreign clients. With the Ruma tannery in Hazaribagh, Fortuna’s vertical linkage gives it an additional competitive edge. The high-tech web portal set by its sister concern Ifrablue, which has won accolades from foreign buyers, also sets Fortuna’s footwear apart from its competitors like Bay Emporium and Jenny’s

in

Bangladesh. Fortuna also aims to have an online presence and uses third party B2B websites like Alibaba to showcase its products to foreign buyers. Even though the recession hit the countries in the west quite hard, there is a demand for day-to-day footwear at an affordable price. This is where Bangladesh’s capabilities comes in and Mr Fayaz hopes to leverage these opportunities to help Fortuna move forward. “We want to continuously improve,” he believes. His young team who has been with the footwear unit since its inception, are a mixture of young, ambitious and capable employees who share the same vision as their boss.

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Mr Fayaz has also set quantifiable goals for its footwear unit. He believes that Fortuna will reach China standard some day. Currently China makes 400-500 pairs of ballerina shoes per hour, whereas Fortuna makes 250-275 per hour. The target is to make 300-325 ballerina shoes per hour by the end of this year, and keep increasing its capabilities in the years to come. Apart from Fortuna’s advantage of being a large conglomerate with an established brand name, Mr Fayaz believes that its young team is the biggest asset of the company. Nashad Moyukh, who is the assistant factory manager of Fortuna’s footwear unit, joined in 2010 right after graduating in engineering from University of Dhaka. With on-the-job-training from his seniors, Mr Nashad now believes that he has become fully capable of handling the factory work. He boasts Fortuna’s fully compliant factory which foreign buyers always inspect before placing orders at Fortuna. Altogether, Mr Nashad envisions that Fortuna will be able to get to the next level by increasing its plant capacity and productivity. Fortuna also maintains its business by employing the values of Total Quality Management. As Ashraful Alam, the quality manager of Fortuna explains, the company follows all the requirements of the foreign buyers and has state of the art lab facilities for its moulding unit in the factory. Shoes are checked at every level and a final inspection is done to make sure the end-product meets all the requirements of the buyer. Furthermore, Ashiq Iqbal, head of planning, explains how Fortuna’s customized excel sheet helps to maintain good production flow in the factory. There are plans to build a cloud system so that the work can go digital and communication is enhanced. This will help to monitor and share planning reports, production reports as everything will come under one platform. Consequently, deadlines can be met more smoothly when such digitization has been installed. With his entrepreneurial vision and the passion and commitment of the young team, Mr Fayaz Taher strongly believes in taking Fortuna, and ultimately Bangladesh’s footwear industry to a higher level through continuous improvement and forward thinking. Its advanced factory facilities, public relations and brand name, are only some of the tools and Mr Fayaz believes in leveraging his young team to achieve the ambitious vision.

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7. LEATHEREX Leatherex Footwear Industries Limited, which is 100% leather based Footwear Company, is registered in Bangladesh as an SME. It has been working continuously with inherited expertise and know-how. It is now a leading footwear manufacturer in Bangladesh, catering to the footwear needs of a global clientele alongside local demand. It manufactures and exports all kinds of Leather Footwear and footwear components.

7.1 COMPANY PROFILE

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Founded in March 2000, Leatherex has utilized most modern state-of-the-art machinery for production of footwear. All its manufacturing operations include both automated and manual components. This permits a yearly production of up to 800,000 pairs of shoes and sandals. Leatherex is operated under technical collaboration with Japan, Italy and Taiwan. The main advisor for Leatherex Footwear Industry Limited is Japanese and because of good relationships, most exports are made to Japan and a lot of assistance is also obtained from Japan. Its main products are leather casual, basic and formal shoes, mesh shoes, pumps, men's and ladies sandal and boots. Working Experience of a decade in the field of leather chemicals, processing of raw-hides to finished leather, producing shoe upper to footwear, all contributed to shape the company to what it is today. Leatherex Footwear Industries Limited has been awarded as one of the top 16 companies in Bangladesh in 2010. It has also won numerous other awards and accolades over the years in lieu of its excellence, including D&B Corporate Award 2010, The Financial Mirror Business Award 2005, and National Export Trophies for the years 200809, 2005-06 and 2001-02. Leatherex Footwear Industries Limited is associated with five other companies, namely Impex International Impex, founded in 1999 is an expert and experienced in handling leather sector for more than a decade. Impex International is a buying agent on behalf of many world famous companies; Sannyo Leather Co. Ltd., Himeji, Japan being one of them.

Catalyst Polymer Catalyst Polymer Industries Limited is a 100% export shoe component manufacturing industry in Bangladesh. Founded in 2001, it is now manufacturing following Shoe components :

TPR Sole

Mid Sole

Heel

Lift

Different Wedges

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The technology of Catalyst is adopted from Japan, Italy and Taiwan. Catalyst exports for the footwear of Europe, Japan and Korea. Catalyst imports raw materials from reputed suppliers globally. Catalyst has its own design development and processing lab (R&D), it can develop products according to the design of the buyers, new ideas, new creations, new inventions to the reality. Nazmul Food Ltd. It is a sister concern of Leatherex Footwear Industries Limited. Scarpe e Moda Ltd. An Italy-Bangladesh joint-venture leather footwear manufacturer, Scarpe e Moda Ltd. operates under Italian technical know-how and to produce hi-tech and top Italian brands in Bangladesh, those of which are sold in Europe, USA and Australia. The company has started its commercial production from 2nd May, 2011. Scarpe e Moda Ltd. is the sister concern of Leatherex Footwear Industries Limited. In order to gain a better understanding of Leatherex, we must look at six components that make up a footwear industry - suppliers, distributors, manufacturing, designs, exporting and retailing.

7.2 SUPPLIES Leather Leather is one of the main, and most important component of a footwear product for Leatherex. Leather for shoes and sandals is obtained from: 1.

Local tanneries of Hazaribagh - Ninety percent of Bangladesh's shoe leather is

made in the Hazaribagh district. Leatherex also obtains nearly all of its leather for processing into footwear from one of the 200 tanning factories in Hazaribagh district. 2.

Impex International Limited - Impex is an association and sister concern of

Leatherex, owned by the same owner Mr. Nzamil Hassan. It is engaged in the manufacturing and exports of Crust, Lining and Finished leather of Cow, Goat and sheep in Bangladesh.

The company has a lot of experience in trading of raw hide and

processed leather. Page | 47

3.

Lastly, if the demand for leather is still not met then Leatherex imports from India,

Pakistan or Italy.

Outsole The outsole is the layer in direct contact with the ground. Dress shoes often have leather or resin rubber outsoles; casual or work-oriented shoes have outsoles made of natural rubber or a synthetic material like polyurethane. The outsole may comprise a single piece, or may be an assembly of separate pieces, often of different materials. On some shoes, the heel of the sole has a rubber plate for durability and traction, while the front is leather for style. Outsole is obtained from: 1.

Manufacturers located in Gazipur supply the plastic and TRP soles.

2.

Catalyst Polymer Industries Limited, a sister concern of Leatherex manufactures

outsoles, TRP soles, mid soles, heels and other components of the outsole. This is used by Leatherex in the manufacture of their footwear.

Insole The insole is the interior bottom of a shoe, which sits directly beneath the foot under the footbed (also known as sock liner). The purpose of insole is to attach to the lasting margin of the upper, which is wrapped around the last during the closing of the shoe during the lasting operation. Insoles are usually made of cellulosic paper board or synthetic non woven insole board. Insole is obtained from: 1.

With the use of imported shank boards and sheets, Leatherex manufactures their

own insoles in house. 2.

If demand requirements cannot be met, insole is imported from Japan, Italy,

Korea or Taiwan.

Molds Molds for shoes and sandals are imported from Taiwan, Japan and Korea. Other required materials such as Glue/Adhesive, Zippers/Buckles, Primer, Chemicals, Synthetic Linings, Cotton Linings, Toe Puff, Different Sheets may be locally sourced or imported. The packing inner box, master carton and silica gels, and wrapping paper are also locally sourced and imported. Page | 48

The company has a Supervisory Bond License and imports of all of its raw materials duty free covering GSP regulation.

7.3 MANUFACTURING Leatherex Footwear has a factory facility of 75,000 square feet with 1200 employees, 3 assembly lines and a capacity utilization of 60-70%. Currently it can produce up to 800,000 units per year depending on the design and article, but the expansion of production and production capacity is possible. Production facility components comprise of insole and components, cutting section, sewing section, lasting section, outsole section - leather, jute or plastic, TRP sections, finishing section and finally packing section.

7.4 DISTRIBUTION Leatherex is mainly export oriented; they take orders from buying agents and marketing companies working for large overseas clients such as Japan, UAE, USA and European Union. The buying agents represent these clients and price negotiations, negotiations of payment, terms and conditions are all done through them. In order to be certain that the factory is compliant with rules and regulations, these buying agents also make regular visits on behalf of their clients. Furthermore, the agents are responsible for product inspection and supervision of packing and container stuffing to ensure that the footwear does not get damaged during shipment. Leatherex has also recently opened a retail outlet for the domestic consumer market where they sell their products directly to the consumers. There are no intermediaries and a 0-level supply chain is followed.

7.5 EXPORTS As previously mentioned, Leatherex is more export focused. The owner Mr. Nazmul Hassan is vastly experienced in international leather products training and because of his good trade relations is able to export to Japan, Korea, USA, UAE, Germany and Italy. Leatherex is well equipped as per GSP regulations and KPT (for Korean market) for duty free access and duty free raw materials import. An Annual revenue of 35 million USD is made from exports only. The main exporting companies are B.Z. Moda by Everybody, Italy, Regal, Alfredo Bannister In, ITO-Yokado and Fitfit.

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7.6 PRODUCT OFFERINGS The designs are made as specific instructions from buyer companies and clients. For exporting purposes Leatherex is associated with Dongguan - Honk Kong Multi trade for designing and sample development. Since they have also opened a retail outlet, there is also an in house innovation team that is working on research and development (R&D) for manufacturing footwear better suited to consumer needs in Bangladesh.

7.7 RETAIL OUTLETS To offer genuine and fashionable leather goods to the Bangladeshi people, Leatherex Fashion and Footwear which is a sister concern of Leatherex Footwear Industries Limited started its journey two years ago in 2012. They have four outlets at Gulshan, Dhanmondi, Farmgate & New Elephant Road. Men’s sandal, casual, formal, women’s sandal, pumps, and boots are their main products. Men’s sandals are priced from Tk 1,000 up to Tk 7,000 whereas woman’s sandal starts from Tk 700. Starting from Tk 1500 men’s shoe can go up to Tk 12,000. The outlets remain open every day from 10.00 am-8.00pm, except the weekend Tuesday. 'I have shopped here for some time and wouldn’t buy my shoes from anywhere else now. Leatherex offers first rate goods at a very competitive price,’ said Karin Ashraf a student of a private university while she was buying her shoes from Leatherex. ‘Every product of Leatherex is strength tested and we emphasize on quality. We never compromise with the genuineness of leather,’ said Nazmul Hassan, the managing director of Leatherex. They have divided their shoes into sections for women, men and kids, and the shop organizes their inventory in multiple ways: one can shop by category; they keep it basic with sandals, heels or boots or by special occasions, casual, dress or office. Whether considering Leatherex’s impressive inventory and extended categories, their wonderfully showcased outlets, their hard-to-find specialty sizes or superior customer service, it is clear that it is one of the best shoe stores.

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Leatherex has launched international brands of leather shoes and bags and Italian famous brand ‘Garden Franco Ballin and Tu Ogi’. Now customers residing here can enjoy world class foreign shopping at home. Leatherex also offers both the in-store and online shopping. To shop online, a customer needs to simply choose his/her design from the official facebook page. Their product number, price including VAT and product description and then need to contact any helpline to book an order can be seen with the picture. To make shopping experience more convenient, they also offer home delivery services. Considering their huge inventory with finely tuned categories and their variations, Leatherex is the shoe store worth checking out.

7.8 CASE: EVOLUTION OF LEATHEREX- ALL THE RIGHT MOVES Strong Vertical Linkage Before founding Leatherex, Mr. Nazmul Hassan Sohail, was involved in the international trade of leather. With years of experience, in 1999 he established Impex International. Impex International started small but is now a buying agent for many companies around the world including Sanyo Leather Co. Ltd, Japan. The company specializes in the manufacturing and exports of crust, lining and finished leather of cow, goat and sheep. In 2000, seeing the potential of Bangladesh in manufacturing footwear using cheap labor and the available high quality raw materials sourcing from inside Bangladesh, Mr. Hassan founded Leatherex Footwear Industries Ltd. Leatherex being associated with Impex Intl. gets cost advantage and has a strong backward and forward vertical linkage. For sourcing the main raw materials, i.e. leather, for its footwear, Leatherex does not have to look for suppliers. Leatherex has more control over the value chain in terms of both quality and costs the raw materials for the ultimate product. This also gives the company competitive advantage over its rival firms such as Fortuna. Differentiation is more viable thanks to the strong value chain integration. While sourcing leather and manufacturing process, for the most part, was internalized to ensure greater control and competitive advantage, the company still had to depend on local suppliers and sometimes imports for the soles. Mr. Hassan felt the need to integrate the production of soles in to the production process of Leatherex. However, soles of

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shoes require a different approach for producing than does the manufacturing of finished leather.

This dilemma lead Mr. Hassan to establish a new company, in 2001, which

specialized in the manufacturing of soles of different kind aptly named Catalyst Polymer Industries Ltd. This move further strengthened the value chain for Leatherex giving it further competitive advantage.

Exporting to non-traditional market The demand of footwear products overseas can be subject to a lot of factors which are out of the control of the manufacturer. The global recession affected the market demand, especially in Europe, for shoes made in Bangladesh. As such, Leahterex expanded its services to non-traditional markets like the Middle East and countries in Asia like Japan and Taiwan. These markets are now more accessible than ever due to the fact that China, mover of 80% of global footwear shipment, is now moving into high-tech industries thereby giving Bangladesh a good potential chance to capture the market.

Recognizing the domestic market Given the context of volatile international demand for the manufacturing services of footwear offered by Bangladesh and hence Leahterex, the company decided to rationalize the international market with the domestic market demand. Not only would establishing Leahterex as a domestic brand ensure a constant revenue stream, it would also act as a launching pad for any future plans of internationalizing the Leatherex Brand. In 2012, Leatherex opened up its first retail outlet showcasing, its premium products for men, women and children under its own brand name “Leatherex”. The demand for leather shoes is growing among Bangladeshis and there is awareness in the local market, thanks to media coverage, about the high quality, world standard products that local companies are being able to produce. This adds to the sustainability factor of launching brands with export quality product lines. Examples of success stories of brands like Bay Emporium and Apex Adelchi only further reinforce the point.

Diversification and expansion Leatherex Industries Ltd. recently expanded their 35,000 sq. ft. factory to a 75000 sq. ft. facility now. They are currently operating at 50% capacity and can fit in more production. The company has also ventured into the production of wider range of footwear and into other leather goods such as wallets, belts, jackets and bags. They are looking for strategic partners both in and out of the country to move more goods. Many exporting companies have already started producing premium quality leather jackets, belts and bags and are marketing them domestically, under their own name brand. Page | 52

Leatherex, although a bit late in the game, is following the footsteps of Apex Adelchi and Bay Emporium and making use of their production capacities and marketing to the domestic market.

8.0 BAY EMPORIUM Bay Emporium Ltd was established in 2001. It is a footwear marketing company with a wide range of products for men, women & children. Its target customer is medium to medium high income groups.

8.1 COMPANY PROFILE

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It is currently one of the major shoe retailing companies. The brand is getting popular very fast. It has 42 retail stores nationwide set at different strategic locations. The brand is famous for leather shoes & leather sandals. Bay’s mission is to satisfy customers by providing commercial fashion footwear at superior value and quality served by competence sales associates. Its vision is to position Bay Emporium as one of the leading marketers of family footwear for medium to medium high income group of customers in Bangladesh. Since Bay Footwear Ltd has been established, it has kept the cooperation reciprocal benefit management conception. Bay Footwear makes efforts to seek customers, suppliers and utilizes growth together to anticipate the mutual assisting and cooperation and create benefit. This also is the origin of their company name “Bay Footwear” which emphasized “Three Wins” management conception.

8.2 SUPPLIES Bay collect their product from its own processing factories. Its first production factory, ”Unit-1”, which was established in 2001, is conveniently located near Dhaka in Konabari, Gazipur. At that time, Bay Footwear Company still focused on vlcanized shoe, sold mainly in Europe & East Asia. Bay Footwear second factory that means Unit-2 in” Mouchak, Konabari” was set up in 2007, and started to produce cold cemented shoes. In 2008, Unit-2 introduced Goodyear Welted construction and the stitch down technology from Europe and started to produce special structured shoes. In order to manage the main materials, Bay Footwear engaged in vertical integration and established the material in factories to coordinate the demands of the production line expansion and to actively control production costs, reduce material lead time and master the production cycles.

8.3 MANUFACTURING Bay Footwear Ltd has two production factories in Konabari & Gazipur which are capable of producing vulcanized, cemented, Goodyear Welted, stitch-down, safety shoes and other construction shoes. The maximum capacity exceeds 5,000 pairs per day. Following along with the improved production quality, the production system regulation conformity, as well as the research and development designed capacity enhancement. Bay do not have any training program of their own, that’s why they only recruit trained employees

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with higher salaries. At present Bay has got around 850 employees working in different branches.

8.4 DISTRIBUTION Bay focuses only on customers and distributes products accordingly. It uses a one-level consumer marketing channel. It has Tannery factory at Hazaribagh and processing factory at Konabari acting as Manufacturers, and the Bay emporium retail shops situated nationwide sells only to the final consumers. At present Bay Emporium have 42 branches established around the nation and sells around five thousands pairs of shoes every year.

8.5 EXPORTS Bay used to supply to different countries including Hong Kong, Italy, France, Japan and UAE. But it decided to terminate its export due to high increase of local demand but relatively lower increase in production rate. So at present Bay sells only in the domestic market.

8.6 PRODUCT OFFERINGS Every year, Bay works with European designers and develops fashion and comfort shoes. Moreover, Bay participates APLF in every year. And also participates Japan Trade Fair 07. In order to stabilize product quality, enhance working efficiency and promote customer service, Bay Footwear uses the advanced management system. Its main corporation and the factories provide a quality guarantee with which Bay Footwear offers its products. The current product features of Bay includesMens’: Sandals, Lace ups, Boots, formal shoes, loafers Ladies’: Boots, Sandals, Ballets

8.7 CASE: HOW BAY POSITIONED ITSELF IN THE MARKET Bay launched their business in 2001. When Bay started their business in market they adopted some action programs. At first Bay decided which customer segment to penetrate and they chose to target the medium to medium high income group of customers in Bangladesh. Then Bay introduced their brand like other brands, and Bay Page | 55

wanted to become profitable. It took a handful of marketing campaigns and advertised their product in Television alongside hanging a few billboards. Sometimes Bay gives discount to their customer in order to supply their shoe at minimum price. The company had been continuing the same action program up to 2011. In 2012 Bay took some new action programs. In first five months Bay gave a lot of mass media advertisement of their product. Bay also increased their showroom across the country like Bata and Apex. After that they set up some bill board near the more busy roadsides. In second three months Bay released advertisements by popular celebrities and offered 25% discount. But when eminent brands like Bata and Apex are the competitors and new brands like Jenny’s are trying to capture the market, Bay’s efforts could not reach the target and it is clear that company needs some extra moves to create a solid position in the market. In response to the stringent competition in the footwear industry of Bangladesh, Bay acknowledged its competitive threats and decided to manifest them more glamorously. When it set up a retail store in Elephant Road, it knew there were already retail stores established by the competitive brands. Nevertheless, they managed to position themselves in the market through effective marketing strategy. The retail stores of Bay Emporium are situated at the 1st floor of the building and another store of Apex is also in operation there. But from the roadside view only the billboard of Bay Emporium is visible because of its enormous size. The company has also painted both sides of the escalator with their logo to lead potential consumers directly to its store. Such extensive marketing program may not have any effect on the loyal customers of other brands, but Bay have successfully managed to catch up to other brands by their tactical marketing strategy aimed to attract potential customers.

9.

COMPARISON OF BUSINESS MODELS

The report has evaluated the business models of six footwear companies - Bata, Apex, Arbana, Fortuna, Leatherex and Bay Emporium.

Among them, Bata is the oldest

footwear organization whereas Arbana is the most recent. All these companies differ from the others, in one way or the other. Their differences reveal some key dynamics of Page | 56

the footwear industry especially when they are compared in terms of their suppliers, manufacturing department, distribution methods, exports scenario, product offerings and retail outlets. Each of these factors is considered separately, and the major factors are emphasized. 

Supplies – Large companies like Bata and Apex, tend to procure their raw materials from independent suppliers. While Bata sources part of its raw materials from independent suppliers at Hazaribagh, Apex’s production depends entirely on them. These companies employ transactional exchange relationship with their suppliers, which are marked by short-term contracts with little repercussions. Smaller scale companies, and more export orient ones like Fortuna and Leatherex have backward linkage and source raw materials from sister concerns of the company. Due to the low bargaining power enjoyed by smaller counter parts, companies like Arbana are forced to have their own tanneries in Hazaribag. Other items like insoles, cushion material, buckles, outsole and other tools and materials like glue, sturdy threads and cutting tools, are usually sourced from China, India and Taiwan. These raw materials are available in Puran Dhaka, but



companies willing to maintain high quality, source it directly via B2B contracts. Manufacturing – All of the companies covered in this report, manufacture their own branded footwear. However, Bata, Apex and Leatherex, import premium shoes from places like Italy, India, and Thailand. With a import duty of around 101%, too much import affects the profitability of the companies but low price



elasticity gives them an upper hand. Distribution – Large companies like Bata and Apex have their own central distribution centers in Tongi and Tejgeon, respectively. Others, like Fortuna, Leatherex and Bay Emporium, are mostly brick and mortar companies, with Fortuna and Leatherex introducing e-store alternatives for their consumers.



Arbana on the other hand, is purely brick and mortar. Exports –Since Bata is a multinational company, its exports does earn foreign currency for Bangladesh. Other companies like Apex, Fortuna, Arbana, and Leatherex, all export to different countries. Japan is the biggest importer of Bangladeshi made footwear. Among the export oriented firms, Arbana stands out, in the fact that it uses its own brand name when selling in middle eastern countries like Dubai. Apex Albechi sells 75% of its exports to European Union countries and its exports make up two thirds of the country’s footwear exports. Bay Emporium, on the other hand, is seen to take a completely different approach from its competitors by closing down its export facilities and solely concentrating on local sales.

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

Product Offerings –Bata and Apex employ price discrimination strategy by offering footwear for many different customer segments that differ in terms of income, age and other demographics. This allows them to enjoy higher profitability and maintain their leading position in the footwear industry of Bangladesh. Other companies like Fortuna, Leatherex, Bay Emporium and Arbana, are more product focused and invest on maintaining high-quality and differentiation in their leather based products. Consequently, they do not have a very wide range of different products and its target customer consists of some homogenous segments which consists of high income groups and fashion conscious individuals. In terms of design of the product, Arbana stands out as its founder and designer Mr Mahim Rashid invests on coming up with highly



differentiated handcrafted footwear. Retail Outlets – Bata leads the local retail market in Bangladesh with more than 200 outlets around the country. Apex follows with a bit more than 100 outlets. Other companies like Fortuna, Leatherex and Bay Emporium, have around 20 retail outlets, most of which are located inside the Dhaka city. Other smaller footwear producers like Arbana have only a few retail outlets located in some major shopping malls inside Dhaka city.

Hence, the above comparison gives a comprehensive view of the dynamics of the footwear industry in Bangladesh. For instance, it can be inferred from this analysis, that large companies like Bata and Apex tend to have a higher bargaining power when it comes to dealing with suppliers; hence, are able to employ transactional exchange with the independent suppliers. Much less established and newer companies like Fortuna, Bay Emporium, Arbana and Leatherex cannot enjoy such advantage and are compelled to vertically link their source of raw materials. This gives them a more comprehensive value chain formation, and it is not surprising that the latter group is able to offer more differentiated and high quality footwear products, which are mostly leather based, albeit at a higher price. Furthermore, as Bata and the follower Apex leads on the local footwear industry of Bangladesh, newer ventures with their ambition and creativity, are tapping a more fashion-conscious market whose consumers are ready to pay at a premium to acquire stylish leather footwear manufactured locally.

APPENDIX A: HAZARIBAGH THE FOOTWEAR HAVEN Linkage between Hazaribagh& Footwear Industry Page | 58

Hazaribagh

has been a controversial name around the

nation for

its serious

environmental effects. But it also plays an unparalleled role in the growth of the leather industries of our country. The location acts as central hub of all the tanneries from which processed materials are delivered to different footwear industries situated nationwide. About 30,000 people work in the tanneries, producing leather for shoes. Ninety percent of Bangladesh's shoe leather is made in the Hazaribagh district (Kogure, 2013). So the location has significant influence over the development of the footwear industry. Importance of Hazaribagh in the Footwear industry Hazaribagh holds the key to the flourishing of the footwear industry, because of its Locational Concentration Historically, the tannery industry got concentrated in the Hazaribagh area of Dhaka city where nearly 90% of all tanneries are located. A number of tanneries took the opportunity in 1990s for the production of crust and finished leather. There are reportedly around 220 tanneries in Bangladesh but, in fact, only 113 tanneries are in effective operation, out of these 20 units are reported to be fairly large (7 units very large), around 45 units are considered of medium size and around 48 units are considered small groups. With the exception of ten tanneries located in Chittagong (and a few in other cities) the leather tanning industry is concentrated at Hazaribagh area in Dhaka (Biswas & Hamada, 2012)..According to estimates, almost 90 percent of the country’s leather and leather goods come from Hazaribagh, suggesting the significance of the location.(Ahmed & Bakht, 2010). Synchronized Developmental Trait The development of tanneries in Hazaribagh can have profound impact in the development of footwear industry. Among the three sub-sectors of the leather sector, the tanning industry is the most important and fundamental of all. There are more than 200 tanneries while the majorities are concentrated in the Hazaribagh area of Dhaka. More than 400 million square feet of raw hides and skins are processed and exported by tanneries each year in recent times. This sub-sector earned revenues in excess of USD 330.16 million during 2011-12 with a growth rate of more than 10 percent. The importance of this sub-sector is grounded on the regular and abundant supply of raw materials from the local livestock base. Additionally, the significance of this sub-sector also stands on the fact that it holds key to the enormous growth potential of other two sub-sectors. It is evident from research that the sector loses massive value addition opportunities in exports as 50% of leather is being exported as lower value-added Page | 59

products in the form of semi-finished and finished leather. Even though the other 50% is being converted into footwear and leather products, most of the exports are targeted towards low-end market. These findings indicate that the planned development of the tanning industry could help entrepreneurs of other leather sub-sectors like footwear indutry to tap bigger export potentials.

Economies of Scale The footwear companies are reaping the facilities of economies of scale due to high concentration of tanneries in Hazaribagh. The established brands like Bata and Bay Emporium have their own shoe processing factories at Hazaribagh. The factories enjoy positional advantage as they can collect raw materials and components at a lower price than the factories located elsewhere. This diminishes the production cost of the companies and allows them to deliver products in the market at a lower price. Besides, the centralization of the processing factories encourages mobility of labor force within the firms, leading to quality product design.

Environmental Trade-offs The contribution of Hazaribagh in the growth of footwear industry is undeniable. But the terrible environmental condition of the place begs the question whether the revenue earned from the sector should be addressed as blood money. There is no waste management system at Hazaribagh. Dozens of chemical materials–including chrome and sulfur compounds–are used to process the leather. The chemicals create a foul-smelling stench that hangs in the air of the Hazaribagh district. Despite the use of hazardous materials, most workers in the tanneries do not wear gloves or masks. A survey conducted in 1999 on 179 workers at tanning factories by the Society for Environment and Human Development, a nongovernmental organization, found high levels of disease. The incidence rate of dermatitis among the tannery workers was 52 times that of the national average, and the rates for gastritis and asthma, respectively, were 37 times and six times the national average. The poor waste management has also contributed to the deterioration of water quality of Buriganga (Paul et al., 2013). The factories and tanneries require installing modern technologies in their production and waste management systems. But the production cost will go up then and it may turn to be a big constrain for Bangladesh to compete with others in the global market. So it

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can be assumed a trade-off relation between the export trend of leather sector and the water quality of Buriganga.

Footwear Industry Potential &Hazaribagh The massive environmental effects incurred by Hazaribagh may pose something more than just an ethical dilemma for the footwear industry. The export of the industry will be seriously threatened if the current condition goes on. Major destinations of our footwear industry like USA and Japan have been constantly raising questions about the manufacturing practices of the industry. Bangladeshi leather products will have no access to developed countries, including those of European Union if the government fails to set up the CETP by June 2014. The industry in Bangladesh as a whole, faces considerable concerns with regard to end-of-life, recycling and re-use of leather and leather products. So the renovation or relocation of the factories manufacturing at Hazaribagh has become a doctor’s order to retain national image and ensure uninterrupted growth of the footwear industry.

APPENDIX B: QUESTIONNAIRE FOR ORGANIZATION PERSONNEL 1. Suppliers of Leather material: a. Who supplies? b. Is the leather processed before being supplied or after? c. If “before”, what kind of processing specification does the company (Bata, Apex, Leatherex) d. require? e. d. How does Eid ul Adha affect things regarding supply of leather? 2. Suppliers of other essential parts: (Sole, Velcro, Tag, Insole, Heel, etc.) a. Do you make or buy these parts? b. If you make, do you make other products in the same facility unrelated to shoes c. If you buy, do you buy domestically or import from abroad? d.

If you buy, how strong is the suppliers’ bargaining power?

3. Distributors: a. Do you market to consumers or industries or both? b. What type of supply chain do you follow?

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c. Elaborate on the supply chain intermediaries, if you have any. i. Value addition by intermediaries ii. Terms of trade iii. Power of negotiation iii. Nature of relationship (longstanding or new) 4. Manufacturing: a. How many production facilities (shoes and shoe related plastic/metal/textile product) do you have? b. Where are your factory/factories located? c. How long have they been active? d. How big is the facility in terms of size and production capacity e. What is the industry average of the size and capacity? f. How many workers are employed? g. How long are they trained for? h. Who engineers/designs the manufacturing for the many different types of shoes that might be required to produce? (not every shoe is produced using the same technique) 5. Design: a. What type of shoes do you produce (male/female) (formal/sneakers/ballerinas/high heels) b. Who designs your products? (local inhouse designers/foreign designers from foreign buyer companies like H&M and what not) c. Are your in house designers trained? If so, by whom? d. Are your designs inspired by local or international trends? e. How do you make sure your designs are in line with your brand image (when you’re selling under your own name as opposed to exporting)? Page | 62

6. Exporting: a. Do you export? b. Do you export shoes designed by yourselves or do you act as only a manufacturing facility for foreign designed products? c. Where do you export? d.

Name a few of your famous buyers

e. What type of incentives/facilities from the governments of Bangladesh and the importing nation do you get, being an exporter from a developing nation? f. g.

Recently the leather industry was removed from “PRIORITY SECTOR”. How does that affect you? Do you: i. export to established name brands? (H&M) ii. export to countries under you OWN brands? iii. export to countries without as brandless products?

h. How sustainable do you think the export market is compared to the local demand? i.

Who are your competitors in exporting (other large exporters from BD)?

j.

Who are your competitor countries in exporting?

7. Retail: a. How many retail outlets do you have? Since when are they operating? b. Where are they? c. How is the local demand pattern (design, frequency of purchase, reservation price) compared to international? d. How does Eid and other festivals affect demand? e. How does local non-brand retailers located in cluster on and near Elephant Road affect your business? f.

Who are your main industry competitors? (Apex VS Bata)

g. Who are you main market competitors? (Cat’s Eye, Artisti, Mustafa Mart VS Apex) [Different industry same market] [Please note that Cat’s Eye and Artisti outsource their manufacturing and designing to Thailand for shoes. Ato boro gadha -_- ] h. What would you say your current local market share is like? i.

Do you have any INTERNATIONAL retail outlets? If so where? Since when? How has it been doing?

8. Talk about an issue specific to your company.

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REFERENCES About. (n.d.). Retrieved from Fortuna Bangladesh: http://www.fortunabd.com/about Ali, M. S. (2011, July 9). Leather Industry development. Retrieved from News of Bangladesh: http://bangladesh-web.com/view.php?hidRecord=359590 Ahmed, N., & Bakht, Z. (2010). Leather Footwear Industry in Dhaka: A Case Study. Dhaka: Bangladesh Institute of Development Studies. Akter, S. (2010, june 30). Footwear maker eyes expansion. Retrieved from The Daily Star: http://archive.thedailystar.net/newDesign/news-details.php?nid=144761 Bangladesh Bureau of Statistics. (2009). Yearbook 2009. Dhaka: Bangladesh Bureau of Statistics. Bata. (n.d.). About Us. Retrieved from Bata Shoe Company (Bangladesh) Ltd.: http://www.batabd.com/about-us.html Bata Shoe Company (Bangladesh). (n.d.). Retrieved from Bata: http://www.batabd.com/ Page | 64

Business to Business- Wholesale. (n.d.). Retrieved from Bata: http://www.batabd.com/B2B/Wholesale Biswas, B., & Hamada, T. (2012). Relation between Hazaribagh Tannery Industry Development and Buriganga River Pollution in Bangladesh. International Journal of Environment, 2(2), 117-127. Choudhury, P. M. (2010). Apex Adelchi Footwear Limited. Dhaka: BRAC EPL. D.K.Acharya. (2011, December). Buyer Seller Meet cum Exhibition of Footwear Components, Dhaka, Bangladesh, Dec.10 -11,2011. Retrieved from Leather News India. Dhaka Tribune. (2013, November 7). Relocation of Hazaribagh tanneries by end next year.

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Tribune:

http://www.dhakatribune.com/bangladesh/2013/nov/07/relocation-hazaribaghtanneries-end-next-year Export Promotion Bureau. (2006-2007). Bangladesh Export Statistics. Dhaka: Export Promotion Bureau. Internatinal Leasing Securities Limited. (2013). Apex Adelchi Footwear Bangladesh Limited. Dhaka: The Financial Express Gazi,

R. (2014, March 28).

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way. Retrieved

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http://www.thedailystar.net/wide-angle/a-cheaper-way-17655 Guardian, T. (2012, December 14). Dhaka's leather industry thrives on poor wage, clean-up. Retrieved from The Financial Express: http://www.thefinancialexpressbd.com/old/index.php?ref=MjBfMTJfMTRfMTJfMV8xXzE1MzE1OQ== International Monetary Fund. (2000). IMF Staff Country Reeport. Retrieved from IMF Staff Country Report Kogure, T. (2013, November 26). Bangladeshi tanneries making shoe leather for Japan poison

workers.

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Niloy,

S.

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ready

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ready-for-rawhide Nur, S. A. (2013, September 8). Footwear customers now prefer local brands. Retrieved from

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http://www.thefinancialexpress-

bd.com/old/index.php?ref=MjBfMDlfMDhfMTNfMV85MF8xODI2OTk= Paul, H. l., Antunes, A. P., Covington, A. D., Evans, P., & Phillips, P. S. (2013). Bangladeshi Leather Industry: An Overview of Recent Sustainable Developments. PKF. (2013). Technical Report: Leather Sector Includes a Value Chain Analysis and Proposed Action Plans. Saha, S. (2014, May 14). Leather industry hits record exports: $1b . Retrieved from http://www.parliament.gov.bd/e-clipping/media/news_file/1400046081.pdf

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