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How Crocs Crashed
Success is sometimes your own worst enemy. Just ask the management and stockholders at Crocs.
A hot brand ends up in one of two different ways. It burns bright too fast and fizzles. Brands like this are known as fads. Or a brand burns hot then continues at a steady simmer. Brands like this are known as iconic.
Believe it or not, whether your brand will become a fad or an icon depends on your strategy more than you think. The good news is the fate of your brand is very much in your control. The bad news is it may be too late for Crocs.
While it’s true that no strategy could have turned the “Pet Rock” into an icon, many brands could have been saved from the fate of faddom.
Brands like Crocs and Cabbage Patch could have been saved by better strategic decisions.
Let’s start with the story of how Crocs took off. Then we can cover how Crocs crashed and burned.
In the Western Rockies of Boulder, Colorado, in 2002 three longtime friends and created a lightweight antimicrobial foam they called Croslite using a technology created by a Canadian laboratory in 1999. They molded it into a boating and water-sports shoe they named “Beach.” Thank goodness, they abandoned the Beach name and the shoes became known as Crocs. The shoes quickly caught on and developed a loyal and vociferous following.
By 2005, revenues were $108.6 million, net income was $16.7 million for a net profit margin of 15.4 percent.
By 2006, revenues jumped to $354.7 million, net income was $64.4 million for a net profit margin of 18.2 percent.
That same year, the company riding a wave of success sold shares to the public raising more than $200 million making it the biggest stock offering in shoe history. The company used the money to ramp up manufacturing, diversify the line and acquire new businesses.
Things were looking fantastic, or so management thought. In 2007, Crocs hit a high-water mark of $847.3 million in sales with a net profit margin of an astounding 19.9 percent.
In 2008, the wave came crashing down. Sales dropped slightly to $721.6 million, but the company lost $185.1 million. Crocs had to slash 2,000 jobs and its stock price has plummeted 76 percent. Today Crocs has millions of dollars of debt and a huge surplus of shoes.
What caused the collapse of Crocs? Many articles have blamed the economic slowdown. But could the recession really be the reason for the fall of $30 Crocs? I think there is a far more likely answer.
When a brand is hot, it is hard to predict anything but a bright future ahead. It seems anything and everything you do is a good move. But nothing could be further from the truth. A hot brand must be managed very carefully.
Here are the keys to keeping a hot brand “hot.”
1. Dampen Demand.
Suddenly everybody wants to wear Crocs, buy a Cabbage Patch doll or stay warm with a Snuggie. There are lines of prospective customers and mass hysteria.
Every company's dream right? But what to do next?
The worst thing to do is over-produce. If you flood the market with your product, it can lose its appeal. Some people will buy it who don’t really want it. While you may rack up some amazing short-term sales, long term you will undermine your brand’s specialness and exclusiveness.
Crocs did just that. The company rapidly ramped up production in 2006 which led sales doubling in 2007 but also created a fad not an icon. Instead of patiently fanning the flames, Crocs added fuel to the fire. Overnight everybody was wearing them and then nobody wanted to be wearing them.
Crocs didn’t just flood the market with a wide variety of its classic Crocs in a rainbow of colors, it quickly added many other styles. Flip-flops, sandals and an assortment of other types of Crocs were developed. Especially troublesome was the fact that many of the expanded styles were meant to be attractive. The idea of Crocs is not to look beautiful but to be functional. If people want fashion, there are many other brands to look at.
In addition, Crocs spent millions buying up other companies in order to line-extend. They bought Jibbitz which makes the do-dads used to decorate Crocs for $10 million. Buying Jibbitz was probably a smart purchase especially they kept the unique brand name. But Crocs made other horrible purchases like buying EXO Italia which made vinyl shoes like Teva and Fury Hockey which made sports-protection items like sticks, gloves, pants and elbow pads. There was even talk of launching Crocs clothing. Not surprisingly the expansion efforts fell flat. The Fury business was liquidated last year.
The expanded line turned Crocs into just another brand. At first, Crocs had an enormous advantage because it owned an idea and an image in the mind. The multitude of styles undermined that image and destroyed the power of the brand.
3. Control Distribution.
Crocs went from being available in just a few retail outlets to being available in every imaginable retail outlet. While that fueled sales, it also hurt the brand’s power with the distribution. Retailers no longer saw it special being able to stock Crocs.
We normally recommend that new brands start with exclusive distribution deals. That way the retailer has an incentive to promote the brand.
4. Focus on Core Consumers.
Crocs went from a sports enthusiast shoe to a shoe for everyone. A brand that tries to appeal to everyone ends up appealing to nobody.
Croc loyalists saw Crocs on everyone and said Geez, they don’t make me stand out and look different anymore.
The key to making a brand an icon is having a base of loyal consumers. Instead of chasing everyone, Crocs should have resisted that temptation and stayed focused. This is the key to keep a brand becoming a fad.
What are the core consumers for Crocs? Kids, athletes, workers. Forget the soccer moms/dads, grandmas/grandpas, fashionistas and everybody else.
Kids in particular were a big part of Crocs’ success. Kids are also great customers because they have feet that grow. Sure, Crocs may be indestructible, but when your feet keep growing you need a new pair every six months anyway. Kids also love the Jibbitz which allowed each pair to be personalized.
Athletes are the customers Crocs started with. Athletes gave Crocs a natural distribution strategy of sporting-goods stores like Sports Authority. The shoe is not just trendy but functional. The anti-Sex in the City shoes.
Workers on their feet. Nurses, doctors, chefs and workers of all sorts are the perfect target consumer for Crocs and could have been a long-term steady market.
5. Expand Globally.
Crocs did understand the power of going global. But you should not try to go global all at once. Crocs used its stock-market cash to build manufacturing plants in Mexico and China as well as distribution centers in the Netherlands and Japan.
That was way too much, too soon. Going global is important, but should be done carefully, strategically and slowly. Instead, Crocs flooded the global market with its shoes.
Too bad. Crocs is a great brand with a great name built around a great idea. The missing ingredient was great marketing.