A07-97-0022

Hush Puppies Chile

In July 1992, Ricardo Swett age 50, could look back on a decade of exceptional growth of
his family-owned Hush Puppies line of casual shoes and retail outlets in Chile. Unlike the
parent company which had experienced serious difficulties in the 1980s, Hush Puppies in
Chile had seen profits climb and sales explode by an average of 30% per year since 1985. By
emphasizing excellence in design and by developing a chain of up-scale retail shoe stores as
well as an efficient factory, Hush Puppies had become the favorite brand of upper-class
Chilean men. Expansion into women’s and children’s shoes during the last three years had
also been successfully implemented.

As the company’s market position in Chile soared, Ricardo Swett, who served as gen-
eral manager of Hush Puppies in Chile, began to contemplate further expansion in other
Latin American markets. The company had recently established a limited presence in Uru-
guay, Bolivia and Paraguay and was beginning to enter Argentina with its line of Brooks
athletic shoes. Ricardo was uncertain how fast the company should expand in these coun-
tries or whether efforts should be focused instead on promoting exports to North America
or on consolidating the company’s market position in Chile. Ricardo was also wondering
about expanding into other retailing concepts in Chile including athletic and outdoor cloth-
ing stores as well as children’s shoes and apparel. In contemplating how and when to pro-
ceed, Ricardo recognized that key family members were waiting for a recommendation.

Company Background
Hush Puppies Chile began operations in 1980 through the concerted efforts of three broth-
ers, Alfonso, Ricardo and Juan Pablo Swett. In the early-1960s, the three brothers formed
NORSEG, a start-up company that supplied safety equipment to industrial and mining
sites throughout Chile. With rising sales and a healthy cash flow, the brothers gradually
expanded operations to include real estate development, several agricultural projects and a
10% equity position in Elecmetal S.A., one of the largest industrial companies in Chile.
Over time, these operations were organized as separate companies under the family-owned
Costanera S.A.C.I. Holding Co.

Copyright © 1993 Thunderbird, The American Graduate School of International Management. All rights reserved.
This case was prepared by Professor Allen J. Morrison, The American Graduate School of International Management,
and Professor James Bowey, Bishop’s University, for the purpose of classroom discussion only, and not to indicate either
effective or ineffective management. Certain identifying information may have been disguised to protect confidentiality.
Wolverine World Wide
In the spring of 1979, the three Swett brothers were informed by their advertising agency,
Veritas Ltd., that Wolverine World Wide was interested in expanding into Chile. Wolver-
ine, based in Rockford Michigan, controlled a portfolio of footwear brands including Hush
Puppies casual shoes, Wolverine work and outdoor boots, Bates uniform shoes, and Brooks
athletic shoes. Incorporated in 1954, Wolverine traced much of its initial success in foot-
wear markets to its reliance on the production of casual pigskin shoes. In the mid-1950s,
Wolverine developed a new elaborate pigskin tannage technology to take advantage of the
characteristics of fine grain pigskin and in 1958 introduced Hush Puppies casual pigskin
shoes.

During the 1960s and 1970s, Hush Puppies emerged as a major brand with particular
strength in the men’s segment. The infamous basset hound became a widely recognized
symbol for quality and comfort. Success in the U.S. was followed by international expan-
sion, initially in Canada and Europe. In the early 1980s, spurred by fears that the U.S.
government might lift import quotas on low cost shoes from the Far East and Latin America,
Wolverine moved to accelerate its international expansion. By 1992, Wolverine World Wide
had established joint ventures or licensing agreements in over 40 countries including most
of Europe, Japan and South America.

In Chile, Wolverine was looking for an agent to import or manufacture Hush Puppies
brand shoes under license. In response to Wolverine’s initiatives, the Swett brothers com-
missioned market research studies which revealed that the Chilean shoe market was domi-
nated by formal, dressy products and that no companies effectively met the demand for
casual shoes. The market research also indicated that Bata, a large Canadian-owned shoe
company with worldwide operations, controlled an estimated 60% market share in Chile.
Bata Chile operated primarily as a manufacturing company which sold the bulk of its out-
put to small independent stores throughout the country. Independent retailers had consid-
erable power over manufacturers in controlling which brands to promote and which styles
to display. Bata also operated several dozen of its own retail stores throughout Chile and was
rumored to be considering further expansion.

Like most Chileans, Ricardo, Alfonso and Juan Pablo believed that the open market of
1980 provided an ideal opportunity to start a new business. The brothers were particularly
interested in the upper class market in Chile which, by exposure through international
travel, was familiar with the Hush Puppies brand, quality and unique designs. Wolverine
World Wide also appeared to be an open company; its managers were supportive and per-
sonable. The brothers agreed that any venture with Wolverine would succeed.

A Move to Retailing
In working with Wolverine, the brothers decided early on that retailing provided the best
option for getting Hush Puppies into Chile. According to Renato Figueroa, Commercial
Manager of Hush Puppies Chile in 1980,

2 A07-97-0022
 Manufacturers risked their efforts, their capital and their futures, while the retailers had
control of the market. . . . Retailers treated all brands alike, not giving special treatment to
any brand in particular. [We came to the conclusion that] the best way was to build our own
store chain. . . . Our decision was based on the notion that we would be able to influence
and handle the market. We would know our consumers. This would enable us to place
Hugh Puppies in a different position from the rest of the competition in Chile.

After negotiations with Wolverine, Hush Puppies Chile was given exclusive rights to
import Hush Puppies shoes and develop retail outlets in Chile. Although no up-front fees
were paid to Wolverine, the brothers committed to opening as many as 25 retail stores
within three years. Expectations were that the costs for the first five stores, including lease-
hold improvements, training, inventories and so on, would total about $2.0 million. Of
this amount, about $1.0 million would be borrowed. The remaining $1.0 million repre-
sented a substantial risk to the brothers.

As agreed, stores were designed as family concept outlets in which both parents and
children could find comfortable, casual shoes. The best Hush Puppies shoes would be im-
ported from around the world with about 80% coming from the U.S. The target market
was identified as high income consumers representing the ABC1 market (top 10% of wages
earners) in Chile. Given the stratification of wealth in Chile, these consumers compared
favorably with upper-middle and upper class U.S. consumers. However, a major difference
was that wealthy American consumers were generally not targeted by Hush Puppies in the
United States.

Stores were situated in large, convenient locations primarily in the Santiago metro-
politan area. The sales staff was extensively trained to better relate to the upscale customers
and were well compensated, reflecting the desire for continuity and professionalism. Shoe
prices were set at a 10% premium over average shoe prices and were the same in every store.
In distant locations in Chile, the plan was for Hush Puppies Chile to grant franchises to
independent retailers. As agreed upon by the brothers, Ricardo assumed responsibility as
the general manager of Hush Puppies Chile. Juan Pablo Swett assumed responsibility as the
general manager of NORSEG Chile. Alfonso was involved in major investment decisions
and strategic planning for all family owned businesses as well as some day-to-day decision
making at Hush Puppies Chile. By early 1982, Hush Puppies Chile had established seven
shoe stores in the greater Santiago area.

A Move into Manufacturing

After several years of promising economic growth, the bottom fell out of Latin American
economies in 1982. Hit by slumping commodity prices, massive national debt, soaring
interest rates, and worldwide recession, the Chilean economy, like every other in Latin
America, plunged into a state of depression. In Chile, the GNP fell by 14% in 1982 alone.
Between the 1982-1985, unemployment officially hovered around 14%; unofficially, it
surpassed 30%. During the same period, the Chilean Peso dropped by 300%, leading to a
commensurate rise in import costs.

A07-97-0022 3
 With Hush Puppies Chile totally reliant on imported shoes, the company was devas-
tated by the economic downturn. Only two options appeared possible: shut down in the
face of massive losses or move into manufacturing. According to Alfonso and Ricardo,
We believed in the brand. The consumer liked it. As a result, we had no choice but to get
into manufacturing. All our businesses have always been very conservative with low debt
load. So we weren’t at real risk in the downturn. We saw the business in the long term.
Besides, we could get into manufacturing inexpensively as everyone else was getting out, so
real estate was cheap.

In April 1982, the decision was made to move Hush Puppies Chile into shoe manufac-
turing. In November 1982, a partnership was formed between Wolverine World Wide and
Hush Puppies Chile with 70% of the manufacturing joint venture owned by Hush Puppies
Chile and 30% owned by Wolverine. Both partners agreed to contribute representative
amounts of capital to ensure that manufacturing output met growth targets.

From Wolverine’s perspective, a manufacturing facility in Chile made sense for a num-
ber of reasons. In 1981, import quotas ended in the U.S. and Wolverine moved aggressively
to shift production overseas. Under the joint venture agreement with Hush Puppies Chile,
Wolverine would have access to a new source of shoes made with low cost Chilean labor.
The U.S. company would also receive royalties on Hush Puppies sales as well as benefit
from profit sharing from the Chilean production facility. Finally, Wolverine’s wholly-owned
Puerto Rican affiliate would become an ongoing supplier of some selected components for
the Chilean operation.

In February 1983, a small new manufacturing facility was opened in suburban Santiago
which included approximately 10,000 square meters of manufacturing capacity, a two story
executive office complex and factory retail outlet. Manufacturing, import and export sales
were handled by Hush Puppies Chile, Ltd. Retail operations were organized under the
separate company name of Commercial Puppies, Ltd.

Hush Puppies Chile and Commercial Puppies were both organized with their own
board of directors, which included the three Swett brothers, as well as a small group of
trusted, Western-educated managers from the operating companies. Most directors served
on two or three boards. Strategic decisions were made at the board level and passed down to
the operating company general managers. While both Hush Puppies Chile and Commer-
cial Puppies were recognized as separate companies with their own functional structures,
managers worked closely together to coordinate activities.

Rapid Growth
By 1985, the Chilean economy started to turn around and from 1985-1990 the company
enjoyed rapid growth. In 1985, Hush Puppies added Brooks athletic shoes to fill out its
product line. Brooks Athletic Shoes was owned by Wolverine and had benefited in the U.S.
by the upsurge in interest in physical fitness. While some of the Brooks shoes were to be
manufactured in the Santiago area, most were to be imported from the Far East. It was

4 A07-97-0022
anticipated that about 70% of the Brooks shoes distributed in Chile would be sold to
outside retailers; the remaining 30% would be sold in Hush Puppies shoe stores.

As overall sales picked up, Hush Puppies Chile and Commercial Puppies focused more
on building and maintaining key brands. The objective was to develop a reputation for
excellence in marketing by emphasizing advertising, service and style. Feedback from retail
stores proved a major strength in focusing design and manufacturing on consumer needs.
Hush Puppies Chile managers regarded the company as market oriented as opposed to
manufacturing oriented, thus differentiating the company from many Far East suppliers.
By the end of 1985, Commercial Puppies was managing 22 company-owned stores and
Hush Puppies Chile was supervising four franchise stores.

To strengthen marketing efforts, advertising budgets were expanded, reaching 5% of

sales in 1987. In 1987, the company started a major advertising program titled “the plea-
sure of walking” which was particularly appealing to increasingly health conscious upper
and upper-middle class Chileans. Follow-up multicolor ads promoting Hush Puppies’ line
of outdoor casual and hiking boots were placed in major newspapers and top magazines
throughout the country (see Exhibit 1). Television advertisements were also developed which
focused on Hush Puppies as statements of quality and style. During the late 1980s and early
1990s, Hush Puppies Chile won three annual Wolverine World Wide awards for the qual-
ity of its advertising campaign and marketing strategy.

The company’s strategy to strengthen the Hush Puppies brand succeeded. By the end
of 1987, the production of shoes reached 265,000 pairs, an increase of 18% over 1986. In
1988, production increased an additional 15% to 305,000 pairs; in 1989, shoe production
was up 29% to 392,000 pairs. Despite these impressive gains, the company remained rela-
tively weak in two important categories: women’s shoes and children’s shoes. In an effort to
reposition itself in these fast-growing segments, several bold initiatives were undertaken in
the late 1980s.

A Move into Women’s and Children’s Shoes

To strengthen the company’s position in the women’s shoe market, more effort was devoted
to product design and marketing. The women’s product manager, Cardina Schmidt, be-
lieved that prior to 1990 the women’s product line had not adequately satisfied the style and
fashion demands of Chilean women. Good design was particularly important in the women’s
segment in which styles changed nearly every six months. Women in the target segment
were particularly fashion conscious and were generally familiar with the newest fashions in
Europe and North America.

In order to make Hush Puppies more appealing to women, high fashion shoes were
imported from Italy, France and Argentina. Hush Puppies Chile also hired exclusive design-
ers to develop its own collection of women’s shoes. Designers and managers regularly visited
Hush Puppies stores to question women on desired design features like colors and styles.
New window displays were designed to establish a more stylish image and a major televi-

A07-97-0022 5
sion advertising campaign was launched. As a result of these efforts, sales growth in the
women’s segment increased dramatically.

During this same period, the company also undertook a major initiative in children’s
shoes. The history of the company’s efforts with children’s shoes was reported by Sebastian
Swett, a second generation family member and Product Manager for children’s shoes,

Surveys detected great opportunities for us in the children’s market. The market was very
traditional. It offered old models in brown or white. . . . The market seemed willing to pay
a higher price for shoes with aggressive colors and concepts such as comfort and security. . . .
We had a few advantages such as the excellent Hush Puppies’ image which was attractive for
children and easily identified. . . . We also had several disadvantages. Our stores were not
appropriate for selling kid’s shoes; other competitors had years in the market; [and finally]
we didn’t have the machinery to develop a great collection for kids up until 12 years in age.

In early 1990, Hush Puppies for Kids was launched, consisting of four different cat-
egories which varied according to the age of the child. Soft Puppies shoes were introduced
for infants; Little Puppies were designed for children age one to three years; Young Puppies
were introduced for children age four to eight years; and finally, Junior Puppies were de-
signed for children age nine to fourteen years. The introduction was accompanied by exten-
sive television advertising. Hush Puppies for Kids was an immediate success.

Strengthening the Athletic Position

By the summer of 1989, Brooks was positioned as the number three brand in the Chilean
athletic shoe market after Diadora and Adidas. In the U.S., however, Brooks was a relatively
weak brand, a fact not altogether lost on fashion-conscious Chilean adolescents, and L.A.
Gear was emerging as the top brand for adolescents. L.A. Gear was a relative new comer in
the athletic shoe industry and, to capitalize on its increasing popularity, had begun to search
for international distributors. The opportunity to market a more fashionable brand in L.A.
Gear was clear and Alfonso approached the company in the summer of 1990.

After considerable discussion, L.A. Gear agreed in the Fall of 1990 to work with Hush
Puppies Chile to bring the L.A. Gear brand to Chile. L.A. Gear shoes would be imported
from U.S. inventories or directly from the shoes’ manufacturers in Korea and China thus
sparing Hush Puppies any manufacturing risks. Hush Puppies Chile’s intention was to
consolidate the L.A. Gear operations with those of Brooks; however, L.A. Gear insisted that
Hush Puppies Chile create a distinct sales company to maximize the brand’s potential.
Wolverine World Wide was also very concerned about the impact that the L.A. Gear initia-
tive would have on Brooks in Chile. In response, Costanera created Topsport to manage the
sale of L.A. Gear. A separate company, Coast Sport was organized to manage all Brooks sales.
It was hoped that creating separate companies for athletic shoes would allow greater focus
on Hush Puppies brands as well as encourage new sales initiatives for athletic shoes.

6 A07-97-0022
Wolverine’s Manufacturing Position is Purchased
In December of 1991, Costanera acquired the 30% of Hush Puppies Chile operations owned
by Wolverine World Wide. The buyout was prompted by Wolverine’s failure to support
Hush Puppies Chile’s ambitious expansion plans. During late 1989 and 1990, manufactur-
ing facilities were increased over 30% in Chile in order to keep pace with booming demand.
Plans called for production capacity to be increased by another 20% in 1991. New invest-
ment requirements in Chile as well as other countries, combined with the need to reinvest
profits, translated into a negative cash flow for Wolverine. At the same time, Wolverine was
facing changes in the business in the U.S. and was struggling to conserve capital. As a result,
a buyout became an attractive option for both parties. The purchase of Wolverine’s 30%
share of manufacturing was estimated to have cost Costanera approximately $3.6 million.
With the buyout complete, Hush Puppies Chile changed its name to Forus, S.A. In January
1992, the name of Commercial Puppies was changed to For-Shop, Ltd. Exhibit 2 provides a
full organization chart for Costanera Holding.

Under the terms of the acquisition, Wolverine extended its licensing agreement to
Forus for twenty years. In addition, Forus pushed for and received the rights to manufacture
and sell Hush Puppies brands in Bolivia, Paraguay, and Uruguay. Forus was also licensed to
sell—but not manufacture—Brooks athletic shoes in Bolivia, Paraguay, Uruguay, Chile,
Argentina, and Peru. Outside these countries, sales of Hush Puppies or Brooks brand prod-
ucts could only be made to other Wolverine licensees. For Wolverine, Costanera’s program
for growth, endorsed by the success obtained in Chile, made it the best company to build
sales in Latin America. Increased sales in the region would mean higher royalties to Wolver-
ine as well as an increase in the export of raw materials.

After the buyout, the relationship between Costanera and Wolverine remained strong.
Both companies continued to share designs and coordinate product introductions. Forus
also remained a major purchaser of leather and leather products as well as Brooks shoes.
Exhibit 3 reports the extent of business relations between Forus and Wolverine World Wide
over a six year period.

Broad Market Appeal

By the end of 1991, Forus had succeeded in significantly broadening the market appeal of
its Hush Puppies brands. In the ABC1 men’s market, Hush Puppies was number one in
market share; in the ABC1 women’s market, Hush Puppies was number five in market
share; and in the ABC1’s children’s market, Hush Puppies was number four in market share.
Market mix for the ABC1 segment and Hush Puppies brand sales ratios on a unit volume
basis are included in Figure 1 below.

Growth in Retail Operations

By the end of 1991, total retail sales of Hush Puppies, Brooks and L.A. Gear shoes amounted
to 328,000 pairs. About 74% of these shoes were sold in 25 company-owned stores. An
additional 9% of sales was generated through “Hush Puppies Corners” which had been

A07-97-0022 7
 FIGURE 1
ABC1 Segment Mix and Hush Puppy Sales Mix
(year end, 1991)

ABC1 Hush Puppies Hush Puppies

Market Mix Sales Mix Market Share

Men 24% Men 46% Men 30%

Women 47% Women 30% Women 8%
Children 29% Children 24% Children 11%

established in shoe departments of 14 major retail department stores. In promoting Hush

Puppies Corners, For-Shop agreed to train sales employees and assist in designing and set-
ting up displays. About 10% of the company’s sales was also generated through small inde-
pendent retail outlets. Franchise sales represented approximately 7% of total retail sales. In
1991, the company had five franchise stores located in isolated cities in Chile. By the sum-
mer of 1992, the number of company-owned retail stores in Chile had increased to 26 with
four more planned by year-end. Exhibit 4 presents retail sales data for 1990 and 1991, as
well as projections for 1992.

International Expansion
Although the Swett brothers were pleased with Hush Puppies’ overall growth in Chile, they
were constantly reminded of their sense of vulnerability in the early 1980s. Certainly Costanera
was a much more balanced company by mid-1992 than it had been ten years earlier. It had
a healthy balance sheet, a portfolio of popular American brand names, improving manufac-
turing capabilities, world class design skills and substantial marketing expertise. Despite
these advantages, Ricardo and several managers began to realize that the depth of Hush
Puppies Chile’s market penetration, particularly in the ABC1 men’s casuals would lead to
increased competition from new European and American brands.

With these concerns in mind, Ricardo began considering other alternatives for growth.
A move into men’s dress shoes was rejected because the segment was already highly com-
petitive and because managers at Hush Puppies Chile did not believe that their skill base
would provide the company with a significant competitive advantage. However, other op-
portunities for growth were being seriously studied. These included growth by expanding
exports to North America and Europe and growth through product and market diversifica-
tion in South America.

Export Opportunities—North America

Since it began manufacturing almost 10 years earlier, Hush Puppies Chile had always hoped
to develop a strong export business, particularly to North America and Europe. Success in
exports seemed likely given Chile’s comparative advantage of low-cost labor and Hush Pup-
pies Chile’s excellent styling and product-development skills. Hush Puppies Chile’s manu-
facturing labor costs in 1991 averaged $2.00/hr. including all benefits; in neighboring Ar-
gentina, wages in the shoe industry averaged from between $2.25 and $2.50 per hour. In

8 A07-97-0022
addition to being at least comparable in terms of costs, the quality and consistency of
Chilean labor was generally regarded as superior to that available in neighboring countries.

From a company perspective, an emphasis on exporting seemed to make sense for two
reasons. First, sales to the Northern Hemisphere could potentially offset cyclical sales in the
Southern Hemisphere. Forus was typically over capacity in the period leading up to Fall/
Winter (February through July) and under capacity in Spring/Summer (August through
January). Any additional export sales during the off-season would provide a better utiliza-
tion of plant and equipment while minimizing fluctuations in employment levels. Second,
the additional export sales volume would contribute to ever-increasing manufacturing and
new product development overheads, thereby boosting overall profits.

Despite the appeal, exports to North America and Europe remained relatively modest.
One problem was that exports from Chile were expected to compete with much lower cost
footwear from China, India and the Philippines. Hush Puppies’ domestic target market was
also the high-end segment which added design and service costs that negated many of
Chile’s labor cost advantages. Also, Hush Puppies Chile’s very diversified product line in-
creased per-unit production costs through short production runs while at the same time
removing opportunities for high volume exports. A final problem was that direct and indi-
rect labor costs represented only about 25% of total manufacturing costs thus limiting the
company’s ability to pursue a low cost exporting strategy. Because of these difficulties, sev-
eral managers in the company believed that an export strategy built on superior design and
marketing had the most chance to succeed. Others disagreed, arguing that if Hush Puppies
Chile were serious about substantially increasing exports to North America and Europe it
would have to develop lower priced shoes. Such a move would also open additional mass
market opportunities for the company in Chile.

The company had never seriously considered shifting manufacturing to lower cost
Asian countries. Difficulties in controlling overseas production and the need to respond to
rather fickle customer needs undermined the potential savings of overseas manufacturing.
Managers at Hush Puppies Chile also believed the company had no competitive advantage
in importing. Estimates for 1992 were that the company would import about $U.S. 3.0
million in raw materials (mostly soles and leathers) and about $U.S. 1.7 million in finished
shoes. The U.S. would supply approximately 25% of these imports with the rest coming
from the Far East, Argentina, Brazil, Italy, Spain, Germany, Mexico and the U.K.

Opportunities in Latin America

From 1987 to 1991, the average annual sales growth for Forus, For-Shop and Coast Sport was
20% per year. From 1990 to 1991, sales growth accelerated to a staggering 35%, encour-
aged in part by the rapid growth of the Chilean economy. Strict adherence to free markets
and free trade had lead to booming economic growth in Chile with the economy expanding
an average of 6% per year from 1987 to 1992. Many economists were predicting GDP
growth of 10% per annum throughout the remainder of 1992 making Chile one of the
fastest growing economies in the world and an engine of economic growth in the region.

A07-97-0022 9
(For a brief overview of Chile’s economic development over the last two decades, see Ex-
hibit 5.)

The company’s initiative in Latin America began in earnest in May of 1989 when
Hush Puppies Chile began exporting Hush Puppies shoes to Uruguay. With air freight to
Uruguay averaging about $U.S. 0.55 per kg., transportation costs appeared favorable for
exports. By the end of 1989, the company had sold just over 19,000 pairs of shoes in a
country with a population of more than 3 million. In 1990, Hush Puppies Chile granted
exclusive franchise rights to the Moliterno family, a diversified industrial company based in
the capital city of Montevideo. Moliterno quickly established Hush Puppies Uruguay as a
wholly-owned subsidiary. During 1990, three Hush Puppies retail outlets were opened, two
in Montevideo and one in Maldonado.

Despite high ambitions, sales remained weak. Ricardo was convinced that Moliterno,
with little experience in retailing, had chosen less than optimal retail locations. Stores were
poorly maintained and Moliterno spent essentially nothing on Hush Puppies advertising
and promotion. Sales were also hurt by competition from low priced footwear exported by
financially strapped manufacturers in Argentina and Brazil.

In the Spring of 1991, Forus purchased 55% of Hush Puppies Uruguay. According to
Ricardo, Hush Puppies Chile had always wanted to be a partner with Moliterno. The origi-
nal agreement included an option to buy a majority stake in Hush Puppies Uruguay that
Forus decided to exercise. Under the terms of the investment, Forus and Moliterno contrib-
uted $U.S. 400,000 to create a new company called Hush Puppies Uruguay S.A. which in
turn purchased the Hush Puppies related assets of Moliterno. After gaining effective control
over retailing, Hush Puppies Chile moved to strengthen operations. Sales employees re-
ceived additional training and new store locations were sought out. By the end of 1991,
three more Hush Puppies Uruguay stores were opened, bringing to six the total number of
Hush Puppies locations in that country.

Essentially no Hush Puppies shoes were exported to Paraguay in 1991 and no changes
were planned for 1992. Customs duties on shoes averaged 70% in Paraguay but were being
slowly cut under pressure from the General Agreement on Tariffs and Trade (GATT) as well
as broader initiatives undertaken in creating the Southern Cone Economic Market. Ricardo
believed that as the economy opened up in 1993, Forus would begin some modest exports.

In Bolivia, a country of seven million, Forus established a licensing agreement with

Global Trading Company of La Paz. Although the agreement had been in place for less than
a year, two stores had been opened and Hush Puppies Corners had been set up in two
department stores. Ricardo estimated that exports for 1992 would amount to about 15,000
pairs or about $U.S. 525,000. Because of prevailing import tariffs, retail prices in Bolivia
were set at a 10% premium over Chilean net prices. Although it was too early for managers
at Forus to evaluate the long term effectiveness of Global Trading Company in Bolivia,
Forus had an option to buy up to a 50% equity position in the company at a time of its
choosing.

10 A07-97-0022
 In 1992, the company’s efforts in Argentina were focused exclusively on promoting its
Brooks line of athletic shoes. Coast Sport Argentina was established in 1991 and acted
exclusively as a wholesaler for a variety of independent retail outlets in the country. Coast
Sport Chile owned 80% of the new company, with the remaining 20% owned by NORSEG
Argentina, which had NORSEG Chile as a majority owner. Brooks shoes were imported
directly from factories in the Far East or from Coast Sport inventories in Chile. Ricardo
estimated that in 1992 in Argentina the company would sell about 32,500 pairs of Brooks
shoes, worth approximately $U.S. 1.0 million.

Recent Developments
After witnessing almost a decade of accelerating growth and profits, Ricardo was reflective.
Projections indicated that 1992 would be the best year ever for the company with after tax
profits at over 15% of sales and return on equity surpassing 35%. (Financial statements for
1990 and 1991 are reported in Exhibit 6.) With such growth and profitability, it was easy to
feel confident.

By the summer of 1992, Ricardo was weighing a number of options to recommend to

Alfonso and Juan Pablo for consideration. One major thrust under consideration was to
move aggressively into the retailing of apparel. Although Costanera had little experience
with clothing, apparel seemed to fit well with the company’s other retail operations. It was
thought that the best way to proceed would be to open a chain of stores combining both
Brooks and L.A. Gear athletic shoes with brand sports clothing. While the combination of
athletic shoe and clothing stores had proved a major hit in Europe, Japan and North America,
it had yet to be effectively pursued in Chile. A combination outlet would have the advan-
tage of allowing the company to move incrementally into apparel while concurrently ex-
panding athletic shoe sales. Costs for retail space in a typical up-scale Santiago shopping
mall were estimated at 7% of net sales with leasehold improvements averaging about $U.S.
30,000. Unfortunately, the company did not have a brand under consideration and was
wondering how to aggressively proceed.

A second option being considered was to open a chain of outdoor clothing stores. The
outdoor clothing and accessory market was particularly attractive because it was a segment
that appeared to have been neglected in Chile. Through visits to the U.S., all three Swett
brothers had become familiar with a variety of fast growing outdoor clothing stores such as
Timberland, Eddie Bauer and North-by-Northwest. Market research in Chile indicated
that outdoor clothing sales could grow rapidly and Ricardo wondered if he should recom-
mend a major move into this segment. What was uncertain was the extent to which the
skills learned in marketing shoes could be transferred to outdoor clothing.

A third option for the company was the introduction of a new retailing concept for
children’s shoes and apparel. While first Hush Puppies Chile and then Forus had been
selling children’s shoes for the past 10 years, the introduction of Hush Puppies for Kids had
been a major hit in the marketplace. In July 1992, managers at Hush Puppies Chile were
debating whether to extend the Kids line to include brand children’s clothing and accesso-
ries. A full line of merchandise would accompany a full move into children’s retailing by

A07-97-0022 11
filling out stores and providing an added draw for consumers. Wolverine had been trying
for years to introduce Hush Puppies brand clothes for children in the U.S. but the efforts
had not gone well. To better develop a recognizable brand in the U.S., Wolverine had just
recently adopted the Hush Puppies for Kids logo which had been developed in Chile. While
Ricardo realized the potential for new retail concepts, he was also fully aware that a move-
ment into retailing would have serious consequences for the company.

Behind the increasing interest in diversifying the retail base of the company was the
recognition that retailing was becoming more specialized. The need for even greater special-
ization was articulated by Renato Figueroa, General Manager of For-Shop’s retail operations:
“As the market becomes more globalized, our next move must be to specialize in our stores.
Where we have family stores, we must in the future have men’s stores, kid’s stores, women’s
stores, and lifestyle stores.”

Ricardo was also faced with the decision of focusing management efforts on either
increasing sales in Chile or on expanding sales in other Latin American countries. Some in
the company argued that Costanera could do both at the same time. Others disagreed by
highlighting the risk that foreign operations would siphon critical resources away from core
Chilean operations. For Ricardo Swett, the critical issue was management.

Our big problem with growth is people. How can the management of the company keep up
with such rapid growth? We need good middle managers. . . On average, about 60% of our
senior managers have had formal university training in management. When we exclude
manufacturing managers, this number climbs to about 80%. Still, we spend a lot of effort
training our managers. On average, each of our managers receives about 2 1/2 weeks of
training per year.

Sometimes I feel that we are moving too slowly. The world is changing so fast that it is
increasingly difficult to stay abreast of what is going on internationally. What worries me is
that our managers might not be reacting fast enough. There needs to be a daily commitment
to learning.

Clearly, Ricardo had much to consider. While any major decision would require the
support of both Alfonso and Juan Pablo, Ricardo realized that they would be relying on
him for direction. Ricardo seemed to have more questions than answers. How fast should
they move and where should they target expansion? Despite enormous success in the past,
it was uncertain which direction to turn.

12 A07-97-0022
 EXHIBIT 1 Sample Advertisement Placed by Hush Puppies Chile in Major National Magazines

A07-97-0022 13
14

EXHIBIT 2 Costanera Holding: Organization Chart

Costanera

Top Sport NORSEG S.A.

Agriculture Elecmetal Real Estate Forus S.A.
(L.A. Gear) (Safety Equipment)

Chile
Spain
Argentina
Coast Sport For-Shop
Hush Puppies
(Brooks) (Retail)

Chile Chile Chile

Bolivia Bolivia
Paraguay Uruguay
Uruguay
Argentina
Peru
A07-97-0022
 EXHIBIT 3 Business Relations with Wolverine World Wide
(thousands of U.S. dollars)

TOTAL 1987-91 PROJECTED 1992

PURCHASES
Leather and Raw Material $ 6,302 $2,000
Hush Puppies Finished Shoes 557 640
Brooks Shoes 3,960 1,400

TOTAL $10,819 $4,040

ROYALTIES
Puppies 1,032 500
Brooks 441 120

TOTAL $ 1,473 $ 783

A07-97-0022 15
 EXHIBIT 4 For-Shop: Retail Sales, 1990-1992

1990 1991 19921

NUMBER OF STORES 25 25 26

SALES (pairs in 000s)

H.P. Men’s 164 188
H.P. Women’s 69 74 125
H.P. Children’s 37 49 61
Sports Shoes 31 41 44
TOTAL 289 328 418

SALES (000s $US)

Total Shoes 8,575 12,163 17,260
Total Accessories 519 841 1,226
TOTAL 9,094 13,004 18,486

AVE. $US RETAIL PRICE (pair) $29.67 $37.08 $41.29

AVE. MONTHLY INVENTORY (pairs in 000s) 122 129 158

ANNUAL INVENTORY TURNOVER 2.4 2.5 2.7

NUMBER OF EMPLOYEES 154 177 203

1
1992 sales are estimates

Note: These figures do not include franchises, department stores or export sales

16 A07-97-0022
 EXHIBIT 5 The Chilean Economy: A Brief Overview

Political polarization under the left wing government of President Salvador Allende (1970-73) brought the
country close to a civil war, and ended in September 1973 with a coup d’etat led by General Augusto Pinochet.
During his 17 year rule, Pinochet turned to the writings of free market advocate and Nobel Prize winning
economist Milton Friedman to guide national industrial policy. Immediately after seizing power, marshall law
was imposed, the economy was liberalized and foreign corporations were invited to return to Chile. Pinochet’s
1980 blueprint for political democratization was completed on December 14, 1989 when a national plebes-
cite was held and Patricio Alwin, the Christian Democratic leader of a center-left coalition was elected presi-
dent. He took office on March 11, 1990. While Augusto Pinochet remained commander of the nation’s
armed forces in mid-1992, the emerging democracy seemed stable and strong to most observers.

The success of Chile’s free market reforms after a decade of stagflation and debt crisis amazed many observers.
Most economists attributed Chile’s enviable economic growth to its unrelenting dedication to free markets.
By mid-1992, the bulk of the Chilean left was no longer anti-capitalist, and a remarkable degree of consensus
existed in the country about the need to maintain a liberal market economy and prudent fiscal policies. The
main dividing issues related to a new labor code granting more rights to unions, and the question of what to
do about serious human rights violations that occurred under the Pinochet regime.

Economic Data for Chile, 1983-1991

1983 1985 1987 1989 1991

GDP ($ billion) 19.8 15.6 18.9 25.4 30.0
Population (million) 11.7 12.1 12.5 13.0 13.1
GDP per head ($’000) 1,692 1,289 1,512 1,954 2,239
Inflation (%) 23.1 26.4 21.5 21.4 18.7
Unemployment17.4 10.9 8.0 4.8 5.2
Total Debt/GDP (%) 91.9 130.7 109.3 68.4 63.1

Despite its interest in open markets, Chile has shunned involvement in Mercosur or the free trade zone that
neighboring Paraguay, Uruguay, Argentina and Brazil hoped to have running by 1994. Confident after nine
years of stability and growth, Chile in 1992 was aspiring to become the first Latin American county to join
NAFTA. If NAFTA membership were to prove elusive, the government intended to pursue a free trade
agreement with Japan, Chile’s top export market after the United States.

A07-97-0022 17
 EXHIBIT 6 Financial Statements for Forus, S.A.
(for the years ended December 31, 1990 and 1991)

Income Statements 1990 1991

(Ch$) (Ch$)

Operating Revenues 3,917,656,542 5,092,329,385

Operating Costs (2,874,204,603) (3,507,627,947)
Gross Margin 1,043,451,939 1,584,701,438
Administrative and Sales Expenses (534,015,090) (666,112,679)
Operating Results 509,436,849 918,588,759
Non Operating Expenses (113,686,107) 110,645,279
Income Before Tax 395,750,742 1,029,234,038
Income Tax 16,273,224 49,547,770
NET INCOME 379,477,518 979,686,268

Chilean$/US$ 337.09 374.09

Balance Sheet 1990 1991

(Ch$) (Ch$)
ASSETS
Total Current Assets 1,678,518,025 2,561,279,678
Total Fixed Assets 2,084,031,742 2,387,101,951
Less Accumulated Depreciation ( 544,166,086 ) ( 699,091,557 )
Investment in Related Companies 1,632,891,422 1,966,126,263
Plus Other Assets
Total Assets 4,851,275,163 6,215,416,335

LIABILITIES AND SHARE HOLDERS EQUITY

Total Current Liabilities 1,530,707,772 1,756,973,367
Long Term Liabilities
Bank Debt 377,752,696 608,837,630
Other Accounts Payable 130,702,501 152,427,111
Total Long Term Liabilities 508,455,197 761,264,741
Total Stock Holders Equity 2,812,112,194 3,697,178,227
Total Liabilities and Equity 4,851,275,163 6,215,416,335

18 A07-97-0022