Alpargatas S.A.I.C.

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Alpargatas S.A.I.C.

THE FIRST CENTURY: 1885–1985

STRUGGLING TO SURVIVE: 1985–2004

RECOVERY IN 2005–06

PRINCIPAL SUBSIDIARIES

PRINCIPAL DIVISIONS

PRINCIPAL COMPETITORS

THE FIRST CENTURY: 1885–1985

Alpargata is a Spanish word, derived from Arabic, to describe a traditional Egyptian sandal that was made more durable by the Romans, who passed it on to Spain, where it was fastened around the ankle with strings rather than a strap. By the time it reached Argentina, the top was made of canvas and the sole of braided jute or hemp. Many artisanal workshops in Buenos Aires turned out this slipperlike article in the second half of the 19th century before Juan Etchegaray, a Basque, teamed with Robert Fraser, a Scot whose family firm made textile machinery, to mechanize production of Etchegaray’s model in 1883. Additional capital came from Ashworth & Co., a Manchester manufacturer of cotton textiles, which also raised money from other British investors and obtained jute from Burma. The business was incorporated in 1885.

Alpargatas extended its operations to Uruguay in 1890 and began producing textiles in 1892, when the first looms for making canvas arrived in Argentina. In 1907 the enterprise that later became São Paulo Alpargatas S.A. arrived in Brazil, with the Argentine company taking a small stake in return for its privileges and patents. Alpargatas shares were first traded on the Bolsa de Comercio, the Buenos Aires stock exchange, in 1913. With the aid of Ashworth & Co., Alpargatas obtained substantial loans from such elite financial institutions as London’s Baring Brothers & Co., New York’s First National City Bank, and, in Buenos Aires, the Banco de Londres.

Alpargatas was especially profitable in the 1920s, when its sales soared to record levels. In 1923 operations commenced at the first cotton spinning mill in Argentina, which met one-quarter of its demand for thread. After that it began using cotton waste to make flannel, rags, and cleaning cloths. The company opened a fabric plant in Buenos Aires in 1928. Five years later, it began making shoes with soles of vulcanized rubber, also in Buenos Aires. During the 1930s it began producing fabrics for tires and, later, plastic shoes, stamped cloths, and clothing. Its growth coincided with the expansion of the domestic market and was also aided by a government policy of import substitution.

In 1950 Alpargatas built a larger plant, in Florencio Varela in the province of Buenos Aires, for athletic footwear, rubber boots, and reinforced work shoes. Its brands—Rueda, Luna, Boyero, Far West—were popularized throughout Argentina. The Flecha line of casual footwear was introduced in 1962. Three years later, Alpargatas opened a cotton ginning factory in Saenz Peña, Chaco. Denim production began in 1968. In 1972 Alpargatas began making footwear in Planta Aguilares, Tucumán; initiated cloth dyeing at the Florencio Valera plant, and started producing children’s shoes and clothing under the Pampero label, later also adopted for work clothing. Other Alpargatas plants were located in the provinces of Formosa (cotton ginning) and Córdoba (for weaving palm fiber). Topper footwear and sportswear made their debuts in 1975, when the company also introduced Media Naranja cleaning cloths. In that year Alpargatas ranked 11th among reporting Argentine enterprises in terms of sales. In terms of profits, it was doing even better, ranking sixth.

Members of the Fraser family were long in charge of Alpargatas. Ashworth & Co., originally the firm’s sales agent and exclusive distributor, cut its ties to the firm at some point. Leng Roberts, a banker who owned Banco Roberts and an insurance company, La Buenos Aires Cia. de Seguros S.A., gradually became the principal shareholder. He made his influence felt directly or through other family members with the surnames Lockwood and Oxenford. Eduardo Oxenford was the head of the firm during the late 1970s and the 1980s. The surname Clutterbuck was also prominent in management until the 21st century.

Alpargatas opened another textile plant near Catamarca in 1978, at a cost of $58 million, to produce cotton and cotton/polyester textiles. This facility was distant both from Argentina’s cotton fields and its prime market, Buenos Aires, but it benefited from tax credits and conformed to the company’s policy of scattering production plants throughout northern and central Argentina.

Also that year, Alpargatas started producing bedspreads, blankets, sheets, and towels under the Palette label in the province of San Luis.

The early 1980s saw continued expansion, although the shares in São Paulo Alpargatas were sold. Alpargatas opened a plant in Bella Vista, Corrientes, for denim in 1981, and the following year completed an addition to the Catamarca plant for Topper footwear soles injected with PVC (polyvinyl chloride), plus another small facility in San Luis principally dedicated to shoe uppers of canvas. It completed a factory in Santa Rosa, La Pampa, for footwear with polyurethane-injected soles. While footwear was directed almost entirely inside Argentina, Alpargatas was making efforts to export its textiles, consisting chiefly of heavy grades of corduroy and denim. In all, some 10,000 workers were employed in 14 plants that occupied 250,000 square meters of floor space in six provinces and the city of Buenos Aires.

COMPANY PERSPECTIVES

Our mission is to be a regional business providing top quality footwear and fabrics for its customers.

Our goal is to become a business leader by promoting sustained growth in sales and profits, creating economic value both for shareholders and employees, and serve our customers, suppliers, and community.

The company had also diversified into fields unrelated to its core businesses, such as sugar refining, petroleum exploration, and banking and insurance. In 1979, for example, it took the majority share in Alpesca S.A., a new seafood enterprise with six ships in two ports and shore facilities for fileting fresh and frozen fish. This joint venture, with Spanish partners, which yielded sales of about $10 million in 1985, was only one of 20 subsidiaries under the Alpargatas umbrella at the time, not including Banco Francés y Río de la Plata, in which it held a 24 percent share.

STRUGGLING TO SURVIVE: 1985–2004

This expansion, at an estimated cost of $160 million over a decade, proved unwise and unsustainable. Petroleum exploration, for example, emerged as a venture requiring much more capital than the company could provide, even though it had a partner in Shell Argentina. By 1985, the centennial of Alpargatas’s incorporation, the company had slipped to 30th place in revenues, and in that year it lost almost $30 million, despite dismissing 1,000 workers in 1984 and imposing a 30 percent pay cut on its managers. Its stock price dropped ninefold in a single month. In order to meet payments on its debt, which was absorbing one-fifth of its revenues, Alpargatas took out a $15 million, five-year loan from the World Bank’s International Finance Corporation (IFC) affiliate and a $20 million, ten-year one from a government-owned institution, Banco de la Nación. Moreover, JP Morgan and Citibank led a $98 million, 30-bank buyback of the company’s debt. In 1988 Alpargatas sold preferred shares to the IFC and three private sector financial institutions for $21 million.

Chastened by its setbacks, company executives directed their efforts toward earning more money through exports, which in 1988 reached about $70 million, or 22 percent of total sales. Frozen fish exports from Alpesca accounted for a significant amount, as did sales abroad of the textile division’s blue denim and clothing. Alpargatas earned about $15 million during the year. Also in 1988, the company opened a plant in Uruguay, its second in that country, for the manufacture of alpargatas made with jute soles. Within Argentina, Topper was doing well, and sneakers made and marketed for Nike Inc. under a licensing agreement were a smashing success. By 1992, Alpargatas also controlled 70 percent of the market for blue denim in Argentina and nearly half of the market for casual and athletic footwear. Denim accounted for almost half of the textile division’s production and included orders to supply brands such as Lee, Levi’s, Wrangler, Calvin Klein, Gloria Vanderbilt, and Guess in Argentina. Denim was also being exported to the United States for brands such as Levi Strauss’s Britannia and J.C. Penney’s Provee.

In spite of these promising results, and its sale, in 1991, of its stakes in Banco Francés and La Buenos Aires for $42 million, plus its entry into the American Depositary Receipts market in New York, Alpargatas was not able to improve its financial position. In addition, the adoption of free market economics by the new administration of President Carlos Menem exposed the company to competition from inexpensive Brazilian fabrics and Chinese shoes. Despite an increase in sales and the dismissal of 1,000 employees, it lost $16 million in 1991. By the end of the year, the company had sold one of the four Alpesca processing plants and put three of its ships up for sale.

Alpargatas also had been roiled by the departure of its top three executives: one by retirement; another, Eduardo Oxenford, by sudden death; and the third, Rodolfo Clutterbuck, by kidnapping. (A Lockwood had previously, in the 1970s, been kidnapped by leftist guerrillas and released only after paying a sizable ransom.) In any case, a banker told Jonathan Friedland of the Wall Street Journal, the company “was run like a Soviet ministry.” According to Friedland, “Running a successful business in Argentina traditionally had less to do with making things well than taking advantage of tax and credit subsidies, lobbying for stiff tariffs and coping with frequent devaluations.… And Alpargatas CEOs were often ex-ministers, recruited more for political clout than business acumen.” In early 1992 about half of all company shares were held by some 20,000 public investors, of which 12 percent were foreign, generally institutional. Members of the board of directors represented three groups of investors, including Roberts S.A. de Inversiones, which (in 1995) held 15 percent of the shares.

KEY DATES

1885:: Alpargatas is incorporated to make the slip-perlike footwear known by this name.
1913:: Alpargatas becomes a public company.
1968:: Denim production begins.
1975:: The company begins making Topper footwear and sportswear.
1985:: Now a conglomerate, Alpargatas has 14 factories and 20 subsidiaries.
1992:: Alpargatas dominates the national market for blue denim and casual and athletic footwear.
1995:: The company creates a retail division to market its products.
1999:: U.S. investment funds take over Alpargatas by assuming most of its heavy debt.
2005:: Alpargatas returns to profitability, with Topper leading the way.

Two U.S. corporations decided to ride to Alpargatas’s rescue in 1994. Nike entered into a manufacturing joint venture that gave Alpargatas access to its partner’s advanced shoe manufacture technology and also gave the joint venture marketing rights to the huge Brazilian market through 1999. Greenwood Mills Inc., a major producer of denim, purchased a 20 percent stake in the textile subsidiary, Alpargatas Textil S.A., for $18 million and provided technical support to rehabilitate the Catamarca factory, which Friedland characterized as “a filthy plant full of battered machines.” Alpargatas was still a formidable enterprise, with 9,700 employees and 16 production sites. It held half of the denim market in Argentina, 42 percent of the market share in athletic footwear, and 35 percent in casual footwear. In 1995, Alpargatas created a retail division by opening a Factory Outlet store on the grounds of its Barracas plant in Buenos Aires.

Still, as Argentina’s economy sank into recession in the late 1990s, Alpargatas could not stem continuing losses, partly because of falling domestic demand and partly because of the burden of making interest payments on its debt, which by 1999 had ballooned to $638 million, mostly owed to banks. Common stock was selling for a nickel a share when trading was suspended. A debt restructuring left 88 percent of the company in the hands of creditors. By the end of the year the main shareholders were the U.S.-based private equity investment funds Newbridge Latin America and Farallon Capital Management LLC. There were a few bright spots: Converse Inc. and Fila Holding S.p.A. had signed licensing agreements with Alpargatas, with Converse even expanding the scope of the agreement to take in other South American countries, including Brazil. Even so, after hitting bottom in 2001 (when it sold its stake in Alpesca), Alpargatas was only in fifth place in its business sector in 2002. Only 4,000 workers were still employed by the company, and the shoe division was turning out only a million pairs a year, just enough to meet current orders.

RECOVERY IN 2005–06

By 2005, however, Alpargatas, like Argentina itself, was in much better health. The company escaped from red ink that year, earning about $13 million, after losing about $12 million in 2004. It had returned to its traditional place as the leader in the footwear and textiles sector. Topper sneakers were leading the way, accounting for some 60 percent of the company’s revenues and selling 5.8 million pairs during the year. A million pairs of the classic alpargata were also sold. By the end of the year, Alpargatas’s debt of about $280 million, mostly held by the public-owned Banco de la Nación, had been considerably reduced.

Nostalgia proved the key to Topper’s surprising advance. Company footwear executives found that middle-aged Argentines retained an emotional tie to the basic white canvas sneaker that tennis star Guillermo Vilas wore in the 1970s, when he was, for a time, almost unbeatable on the clay courts that Argentine players favor. People a decade younger also remembered the sneaker fondly, associating it with rock ’n’ roll, Rolling Stones concerts, and the garb of their youth. Moreover, the economic crisis had accustomed them to rejecting the hyped and expensive products of the big international firms in favor of the homegrown (a phenomenon that marketers tagged with the buzz word “authenticity”). Alpargatas advertised the product with the slogan “You’ve changed, too,” but when this proved unsuccessful, switched to “Everything is in play.” By 2006 Topper was also marketing seven models for soccer, always a mania in Argentina, and lines for basketball, tennis, running, rugby, golf, and volleyball.

Topper articles accounted for more than half of Alpargatas’s revenues in 2005, with footwear alone accounting for almost an even half. Denim for jeans was the company’s other main production activity, accounting for about 28 percent of company sales. Retail sales came to 10 percent of the company total, which was 27 percent higher than the 2004 figure.

Alpargatas still retained its 11 factories—seven for footwear, four for textiles—although production appeared to be well below capacity. Topper was making sneakers with uppers of leather as well as cloth and soles of vulcanized rubber, PVC-injected, and cemented. It was also producing sportswear. Casual footwear included the classic alpargata, rubber boots, and children’s shoes, and came in the Pampero, Flecha, Rueda, Bull, and Tracy brands, among others. The division was also making athletic footwear for others, including adidas, for which it was making vulcanized-rubber models, and Nike. The textile division was producing denim, stretch cotton flat fabrics, and cotton/polyester blended fabrics (canvas, serge, gabardine, and others); cleaning textile products such as floor and dish cloths and kitchen towels under the Media Naranja and Rueda brands; home products such as sheets, bedspreads, and towels under the Palette and Horizons labels; and durable work clothing such as shirts, overalls, reinforced shoes, and heavy-duty gloves under the Pampero trademark. The retail division consisted of Topper Stores, Alpargatas Directos, and Alpargatas Básicos, the latter at discount prices. In 2004 there were 25 stores, not counting temporary ones established at vacation centers, sporting events, and expositions. Five more opened in 2005, including Topper outlets in two seaside resorts and the elegant Buenos Aires neighborhood of Palermo Viejo.

The following year was even better. Alpargatas raised its net revenues by about 20 percent and its operating profit by about two-thirds. Topper brand merchandise accounted for more than half of all revenue. Some 6.5 million pairs of Topper shoes were sold, and 1.6 million pairs of alpargatas. Alpargatas produced ARS 12 million (nearly $14 million) of footwear for Nike and adidas, and at the end of the year began turning out Reebok sneakers with vulcanized soles as well. Denim and jeanswear accounted for 26 percent of company revenue, with 91 percent of sales coming from the Argentine market. Retail operations accounted for 9 percent of revenue.

Robert Halasz