Reebok’s licensee for Brazil and Argentina, Vulcabras, signed a definitive agreement a few days ago to take control of Calçados Azaleia, one of the largest Brazilian footwear groups. Azaleia, a specialist in women’s footwear that has reduced its exposure to the European footwear market recently, owns among other things owns Olympikus, the country’s biggest brand of athletic footwear. The acquisition turns Vulcabras into the largest shoe company in Latin America, but possibly only for a little while.
In fact the management of Sao Paulo Alpargatas of Brazil, which overtook Azaleia as the largest shoe company in the country in 2001, was expected to make a firm offer before the end of this month (it may have happened already) for Alpargatas SAIC of Argentina, a separately owned company that owns another Latin American sports brand, Topper. There is a plan in place to turn the Topper brand into a major factor in the Latin American and global athletic footwear market if the two Alpargatas get together.
Azaleia has been going through a slimming-down cure lately in order to improve its profitability. After closing a factory in Rio Grande do Sul and opening a new one in the Northeast area of the country, it began one year ago to source footwear from China to remain competitive in spite of the appreciation of the Brazilian real (see the enclosed Special Sourcing Issue), particularly in the USA and in the rest of Latin America. About 2 million out of the 45 million pairs sold by Azaleia annually are now sourced from China.
In another strategic move, Azaleia sold its share in a joint venture in the Czech Republic for the distribution of its footwear in key European markets in December 2005 - not only because of the appreciation of the real, but also because the joint venture could not make a profit because of its focus on the kind of summer lines that Azaleia is best for.
From a peak of 3 million pairs a year, Azaleia’s shipments to Europe have declined to about 500,000 pairs annually. Paulo Wolff, who had masterminded the company’s European expansion as its export manager, is now coordinating sourcing in China, but Azaleia is still exporting about 10 percent of its total production, focusing mainly on Latin American markets.
Vulcabras has acquired a 52.3 percent of the ordinary shares in Azaleia and 99.7 percent of the preferential shares with voting rights. The biggest sellers are the De Paula and Volkart families. Shortly before the final agreement, which took place during the Francal shoe show in Sao Paulo earlier this month, Vulcabras had acquired 22.7 percent of the voting rights in Azaleia.
The takeover coincides with the appointment of Milton Cardoso, president of Vulcabras, as president of Abicalçados, Brazil’s shoe industry association (more in on him in the enclosed Special Sourcing Issue).
The acquisition is expected to provide synergies in technological know-how and to allow the two companies to broaden their collections, to improve customer service and to increase their presence in foreign markets. Among other initiatives, officials of Vulcabras plan to capitalize on the development of their Reebok apparel line to put out a line of Olympikus branded sports clothing. There will also be synergies in the sourcing of raw materials, uppers and finished shoes. Vulcabras sources some 40 percent of the finished shoes and 20 percent of the uppers in Southeast Asia for the Reebok shoes that it markets in Brazil.
However, because of a possible conflict of interests as the future owner of Olympikus, Vulcabras may not be able to continue as the licensee of Reebok until its contract for the brand ends in 2015, but while Brazilian officials seem confident that this will be possible, Reebok declines to comment on this speculation. Adidas, which bought Reebok last year, has a sales subsidiary in Brazil.
According to company officials and to the available market research data, Olympikus has a share of 10-11 percent of the Brazilian athletic footwear market in terms of volume with annual deliveries of about 10 million pairs. It is followed by Topper with 4 million pairs, and by Adidas with 3.8 million pairs. Nike, Reebok and Reinha come next with about 3.5 million pairs each. Other major players are Fila with 2 million pairs, Mizuno with 1.8 million pairs, Puma with 800,000 pairs and ASICS with 600,000 pairs. Cheaper local branded and unbranded alternatives still dominate the market in Brazil.
ASICS was distributed by Azaleia, whose core business is in women’s dressy shoes, but the Japanese brand took on its independence on the Brazilian market a few months ago. Alpargatas of Brazil, whose core business is represented by its Havaianas brand of thongs, owns Reinha and is also the distributor of Mizuno and Timberland, giving the company an overall market share of about 12 percent in the Brazilian sports shoe market.
The shares in terms of value are a little different as the average price of a pair of Olympikus shoes is only 95-100 is (€37-39, $51-54), compared with R$120 (€47-$65) for Reebok or R$130 (€51-$70) for Adidas and Nike. While the Brazilian market fell by more than 3 percent in volume last year, it grew by 12-15 percent in terms of the average price, reaching an estimated level of R$3.5 billion (€1.4b-$1.9b) at retail.
Azaleia has been in a reorganization mode since the death five years ago of its visionary founder and president, Nestor De Paola. It remained a big factor in the overall shoe market with flat sales of around R$1 billion (€390m-$538m) in 2006, but its operating margin (EBIT) of 8 percent compares with an EBIT margin of 27 percent for Vulcabras, whose sales have grown at an annual compound rate of about 30 percent for the past five years to reach R$563 million (€220m-$305m) in 2006.
About 10 percent of that turnover is derived by the manufacture of about 6 million pairs of cheap PVC and rubber boots. On top of that Vulcabras makes about 2 million pairs of Reebok sneakers in Argentina and imports 200,000 pairs into that country from Brazil. Because of Argentina’s quotas on imported shoes of all kinds, Vulcabras recently invested into a new plant in Argentina, where its workforce is rising from 600 to 3,000 people, to cope with an expected 40 percent increase this year in its sales of Reebok shoes in Argentina.
Sao Paulo Alpargatas had an EBIT margin of 25 percent on 2006 revenues of R$1.6 billion (€625m-$862m), with compound annual growth of 20 percent in the last three years. About 39 percent of the revenues come from its own and licensed sports brands. The Brazilian company split off in 1982 from its former parent company in Argentina. The Argentinian firm,, Alpargatas SAIC, had an operating profit before amortization (EBITDA) equal to 11 percent of its sales of R$380 million (€148m-$205m) last year. It has been surviving mostly through government loans lately.
Alpargatas SAIC owns the global rights to the Topper brand and derives about 60 percent of its revenues from it. While Topper concentrates on football in Brazil, it is positioned as a multi-sport national brand in Argentina, where it claims a market share of 35 percent in volume and 10 percent in value. Sao Paulo Alpargatas distributes its licensed Topper line in Japan and other countries, paying royalties to the Argentinian firm, but this will end if the Brazilian company buys the Argentinian one.
Together, the two Alpargatas would be bigger than the combination of Azaleia and Vulcabras, but the family of Pedro Grendene would oversee a bigger empire. This Brazilian executive still owns about 10 percent of Vulcabras, a public company with 9,000 employees. He and his brother Alexandre together own 80 percent of another public company, Grendene, which owns numerous brands including Grendha, Ipanema, Melissa and Rider, and had net sales of R$1.1 billion (€430m-$593m) last year.