Question

Skechers international business has been booming with 59% of sales attributed to non-US operations in 2017, an increase of 52% over 2016. One dominant market was China with 4.4 million pairs of shoes shipped in the first quarter of 2018. China had a retail base of 800 Skechers stores with 2,400 points of sale, and a strong e-commerce business. To continue to expand internationally, Skechers decided to expand its distribution network to include partners in Scandinavia, Turkey, and Russia. A major challenge of this larger global footprint was rapidly changing political environments. In the first quarter of 2018, the Middle East and South African distribution suffered a decline given the regional economic challenges.

            The firm’s recent growth had a keen focus international markets with approximately 475 new third-party owned stores to slated to open in 2018. The company believed that global expansion had more potential to grow the top line at a faster pace than the domestic business. Following a strong 2017, Skechers witnessed a growth in both the teen and “fashion-forward” audiences to which they increased marketing support and investment in relevant brand influencers and ambassadors. To manage this growth, the company had to maintain its innovation, development, and distribution. In 2018 the company expected to make additional significant investments in operations and logistics worldwide.

            With a burgeoning worldwide footprint, Skechers indeed faced many challenges. One of the challenges the company faced was its order shifting from the front half to the second half of the year. In 2018, the biggest issue was likely to be weather in North America which has led to slower first half of 2018. With more products focused on the teen and young adult markets, stores were preparing earlier for the back-to-school season shifting timing earlier. In addition, each region of the world had seen a timeline shift which impacts backlogs and incoming order rates throughout the year.

            A second challenge was the rising costs of its global operations. Expenses had grown to a level which could absorb the capacity of the business that was anticipated. E-commerce had been a big part of rising costs as the company continued to build the infrastructure to ship one pair of shoes at a time compared to large shipments to stores. Skechers was experiencing the “growing pains” of maintaining its distribution efficiency.

            A third issue is inventory management. As the company focuses on a larger retail model, especially in China, Skechers is building inventory earlier. This has been useful to support its growing online presence; however, just like in-stores, if the product isn’t sold, the company has to store it at higher costs. Nonetheless, one of the best benefits of Skecher’s distribution model is that the company does not hold third-party distributor inventory, they buy direct from factory. This is an opportunity the company has to increase its brand exposure without increasing its costs.

As a member of Skechers’ senior management team reviewing the situation at the end of the case recommend a plan of action and explain your reasoning.

Answer 1

job becomes more challenging each year as there are more shoes to manage. A multi-billion-dollar global leader in the high-performance and lifestyle footwear industry, Manhattan Beach, Calif.-based Skechers is growing by leaps and bounds – and Galliher must do some fancy footwork to keep up with the growing demand.

The company has grown from a $3 billion brand in 2015 to a $4.16 billion brand by 2017. The growth has mirrored its global network of retail stores that have multiplied from 1,000 stores in 2014 to more than 2,000 stores in 2017. Although the Sketchers brand continues to grow in the U.S. market, its international presence is blooming.

“The U.S. is our largest market,” Galliher confirms. “But our international business is growing like crazy and has become more than 50 percent of our total sales.”

The company sells its footwear in department, specialty and independent stores, as well as through more than 2,650 Skechers retail stores throughout the world and online.

Outside the United States, Skechers’ products are available in more than 170 countries and territories through a network of subsidiaries in Canada, Brazil, Chile and Japan, and through joint ventures in Asia and global distributors.

By the end of the first quarter of 2018, the company had a total of 2,650 Sketchers retail stores worldwide. Of those, 2,197 were outside the United States. Only 203 of its foreign stores were company-owned. By comparison, all of its stores in the United States are company-owned.

Sketchers’ international distributors, join venture partners and a growing network of franchisees have significantly contributed to the company’s growth.

“Our product is in demand,” Galliher says. “We’ve had people knocking on our door for an opportunity to open a Skechers store. So our business model has changed a little. In addition to opening our own stores, now we’re much more receptive to franchising

Skechers has taken action on a number of different fronts. Overseas, it will break ground on a new distribution center outside of Shanghai, China. It will replace three smaller third-party logistics centers in China and service the entire country.

Skechers hopes to have the new 1 million-square-foot facility fully operational by the second quarter of 2019. The property has enough space for another 1 million-square-foot addition in the future, Galliher says.

To further grow its business, Skechers converted several markets from a distributor to a wholly-owned subsidiary model. These conversions include those in Latin America and Central Europe in 2015 and South Korea in 2016.

After converting its Panama distributor into a subsidiary, the company needed to upgrade its distribution capabilities in Latin America. “We opened a new distribution center in Colon and also one in Lima,” Galliher adds.

In addition, the company’s European Distribution Center in Belgium has doubled in size in the past five years. The 1.1 million-square-foot facility services Skechers’ European market that includes the United Kingdom, Germany, France, Spain, Italy, Alpine Region, Central Europe and Eastern Europe.

Since business has been booming in Europe, Skechers is building a 100,000-square-foot facility adjacent to the Belgium distribution center. It broke ground in spring and is expected to be fully operational by the middle of 2019. In the United States, the company plans to add another building, around 750,000 square feet, to its distribution facility in Rancho Belago, Calif.

When it comes to technology, Skechers is making a number of investments. Among them are improvements to its automated storage retrieval system (ASRS) at some of its facilities. An ASRS system consists of a variety of computer-controlled systems for automatically placing and retrieving loads from defined storage locations.

“We put in new technology not for technology’s sake, but because it makes us more efficient,” Galliher says. “The real goal is to improve our response to customer needs.”

Skechers uses different ASRS technologies at different locations. In the United States, Skechers plans to make improvements to its ASRS system at the distribution facility in Rancho Belago. The center, which services all of North America, uses a crane system to retrieve merchandise. In Europe, the distribution center in Belgium uses a shuttle system, which appears to be more efficient.   

“One crane services an entire aisle,” Galliher says. “The shuttle has a retrievable component on all levels, so if one goes down you only lose one level in an aisle as opposed to the entire aisle (as with a crane system).”

The company will be discussing an expansion of the shuttle system in Europe this year. That means adding more aisles.

The improvements to its ASRS systems are the result of a growing demand for its products. “We are looking at technology to better handle the increase in volume in apparel,” Galliher says. “That part of the business is growing. It’s not surprising. It’s been an initiative of ours for the last several years.”

In addition to ASRS improvements, Skechers is also looking to increase efficiency in other areas. “We’re looking at using robotics to help with the offloading of ocean containers,” he adds. “Right now, we’re just waiting for the testing to be done. The mechanics have been there for a long time, it’s the software that’s playing catch up.