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SmartCEO May 2006
Happy Feet
The Short, Strange Trip of Waldies Comfy Clogs
A tale of 21st century manufacturing
By David Callahan
Photos by Bryan Burris
Happy Feet
The speed and structure of business today is mind-boggling. Take, for example, a locally-owned shoe brand named Waldies. Waldies introduced the world to a new single-mold foam shoe category that grew to annual sales of well over $100 million in just four years. This year, as big retailers like Wal-Mart enter the fray, it's reasonable to expect the category could double, triple, or maybe even quadruple from there. If you haven't seen the shoes yet, it's doubtful you'll make it through the summer without doing so. They are hard shoes to miss - bright, fun and ugly as sin. • It's also doubtful that any of the shoes you see will be Waldies, even though Waldies appears to be (in this writer's judgement) the highest quality shoe in the new market segment. Waldies, you see, is undergoing a kind of rapid resurrection, a back-from-the-dead miracle play that is partly due to the efforts of a local Owings Mills company named Direct Dimensions. • Waldies is a quintessential 21st century business story, having gone through just about everything a pioneering brand could go through in just five years: breakthrough success, instant cutthroat competition, poor management decisions, changes in ownership, redesigns, customer confusion, rebirth and, potentially, redemption. The brand may eventually be remembered as somewhat iconic - inventor of a category. Then again, it could just as easily fall off the face of the Earth (yet again). • The Waldies story is significant not because the product innovation is so profound, but because it is the perfect example of what a 21st century American manufacturing startup looks like. As Domino Sugar rusts away out in Baltimore's harbor and locals fret about the loss of GM, the new face of consumer product innovation and speed to market is on display in a small company splitting its brain-trust operations bewtween a tech company in Owings Mills, MD and a warehousing headquarters facility in Fitchburg, MA. • Waldies began life under the ownership of a 20th century kayaking company, but had to shed that old world structure to have any chance of survival. Today, it is owned and run like a 21st century technology company and those survival chances have much improved. Structurally, the company carries little risk - it can profit from sales right away. From a synergistic standpoint, it has the right kind of partners to quickly broaden its technology. And from a manufacturing standpoint, it has finally established a quality beachhead on the right continent - Asia. This is the story of how a new brand finally found its way to the support structure it needed to survive.
The Ruby Red Slippers
(There's No Place Like Home)
I first came in contact with Waldies in 2002. I was visiting my brother Richard, who was entering his final year at Dartmouth College and we were standing around at his fraternity house when I noticed a pair of extremely ugly bright yellow foam shoes lying in the hallway. I took a look at the shoes and was amazed at how lightweight, durable and totally weatherproof they seemed. The material was unlike any shoe material I’d seen before. “What the heck are these?” I asked.
Turned out I was holding in my hands one of the earliest pairs of Waldies, an extremely comfortable and waterproof foam clog. Later that day, my brother and I were walking down Hanover’s main drag and we passed a closed store that had a rack full of the shoes displayed near the front window. “If you can’t think of a good gift someday, get me a pair of those,” I said, “but for God’s sake, don’t get yellow; get teal, blue or black, anything but yellow.”
Richard looked at me like he didn’t know who I was. “You want a pair of those?”
“They’re perfect,” I explained. “I can leave them outside on the deck by the sliding door. I hate flip-flops and sandals, but those might work nicely.” Needless to say, my brother thought the crisp New Hampshire air was getting to me. Next I’d be asking him to bring home bags of organic granola.
Months later, I unwrapped a present and lo-and-behold, it was a pair of Waldies. A red pair of Waldies. “Sorry,” he shrugged, “Only color in your size that wasn’t yellow.”
I tried the clogs on. They were the most comfortable things I’d ever worn. They were also mind-bogglingly hideous – Bozo the Clown has better-looking shoes.
Was red really the only color available or was it a source of sibling amusement? I’ll let you decide.
When spring arrived, I stuck the shoes on my deck, where they endured a summer’s worth of rain, sunshine and backyard use. The shoes held up perfectly well, except for one thing. They faded a bit and were now on the pinker side of red.
I loved the shoes – they were comfortable and extremely utilitarian. But they were also turning pink. This was getting too ridiculous looking, even for just hanging in the backyard. The neighbors might start to talk.
I checked online and found that Waldies was said to be defunct, but that a place in Virginia had bought up much of the “last remaining” Waldies inventory. A quick phone call and soon two pair (one dark blue, one teal) were headed my way for a half-priced bargain of only $15 each.
The shoes that arrived were the same design as the original pair, but they were much stiffer and took a lot of time to break-in. Turns out they were really “Holey Soles” brand shoes with a Waldies logo glued in. They were from a small batch made when the production side of the industry was in turmoil (more on that later). Though not as comfortable as my original red set, the shoes eventually softened up and I even dared to wear them out on rare occasions. Once I donned the blue pair to walk to a soccer game played near our house. My daughter’s soccer coach asked me if I was a doctor. I told him I wasn’t and asked him why he asked. He pointed to the shoes – “a lot of doctors wear those funky things,” he said smiling. I later found out he was right: the medical community loves the shoes, especially surgeons and surgical nurses who must stand for hours at a time and need comfortable shoes from which blood can be easily washed off.
Fast forward to early last December when I was mingling at our Future 50 gala event and ran into Michael Raphael, CEO of Direct Dimensions, an Owings Mills company with a very cool cutting-edge business model specializing in three-dimensional scanning. I interviewed Raphael in June 2004, back when the company was scanning the Liberty Bell on behalf of a French foundry that wanted to create an exact replica (minus the crack) to be rung at the 60th anniversary of the Normandy invasion.
I asked him if he had any interesting projects on the horizon. He rattled off several impressive applications of his technology and then said, “plus we’re branching out into fabrication a bit and getting involved in this footwear thing.”
“What footwear thing?” I asked.
“We’ve taken a 50 percent equity position in this little company that makes these single mold foam shoes. It’s nothing you’ve ever heard of. The shoes are called Waldies.”
“Sure,” I told him. “I own three pairs.”
From the look on his face, I might as well have told Raphael that I kept pet kangaroos in my backyard. It was 15 minutes before he even believed I wasn’t putting him on. He excitedly hustled over to inform Harry Abramson, the company’s business development honcho, that I was part of the cult.
Until that night, I didn’t really know there was a cult, nor that I was a part of it. I had noticed other brands of the shoes in stores, but didn’t know the story of how the category developed. I didn’t know about how Waldies was the first foam shoe -– the originator – brand of the snobby ugly shoe purists.
And I could tell that Raphael wasn’t quite sold yet on what he was getting into. He was letting people around him use some of his company’s resources to build a new experimental rocket ship and was still deciding whether it was safe to get in and light the fuse. Things were moving fast. A competitor company called Crocs was on the verge of an IPO. Meanwhile Waldies had (and still has) just one full-time employee, a man named Bill Hearn. The category originator was planning a comeback from the dead, but would the public care? Was the category itself a fluky fad?
A few months later, I visited Raphael and Abramson at Direct Dimensions headquarters and looked at some samples of the new Waldies, as well as some new prototypes (they were demonstrably better shoes in several respects). And Raphael, I could tell, had finally gained full belief. Not only had the Crocs IPO been a big success, signaling Wall Street’s approval of the product category, but he had met more Waldies cult members at a huge trade show in Salt Lake City called The Outdoor Retail Show. The buyers there convinced Raphael that being one of the high priests of the Waldies cult might turn out to be a lucrative gig.
That show was where the fuse was lit on the relaunch of the new Waldies. Raphael and Abramson had been hoping to get enough commitments to fill a single shipping container. Instead, a three-container commitment had been secured from a single Japanese buyer alone. As I sat studying the new shoes at a conference table in February, the first container was already crossing the ocean and many more were scheduled to follow quickly in its wake. It was an interesting moment in time to observe. It isn’t often that reporters get a glimpse behind the scenes when a product is born, or in this case, reborn.
A Broken Path
Bill Hearn, the president of Effervescent Inc. (maker of Waldies) comes from a modestly famous Maryland family of canoe and kayak enthusiasts. His brother competed in three Olympics and his sister competed in two, most recently coaching the Italian Olympic team in Athens. Bill, himself competed in World Cups and World Championships events and spent a lot of his younger years training on an artificial kayaking course near the Pepco plant in Dickerson, as well as making runs near Great Falls and, more often, Little Falls, which is a section of the Potomac along the feeder canal near the DC line. Hearn grew up in Garrett Park, a stone’s throw from Kensington where another sportsman-turned-entrepreneur named Kevin Plank also can claim to run a company that originated a new breakout category of technical clothing.
But unlike Plank, Hearn did not invent Waldies. In fact, he didn’t think much of the shoes when he first came across them. Waldies were invented in 2001 by a small Canadian manufacturing company called Foam Creations. That company decided the shoes might work well in the kayaking world, because, among other things, the shoes float. They contacted Walden Kayaks and asked if Walden would be willing to carry and market the shoes. Walden Kayaks agreed and decided to brand the shoes “Waldies.” To the surprise of almost everyone, the shoes sold quite well.
More than a year later, another startup named “Crocs” approached Foam Creations and asked to sell the shoes also. “They put a little plug in the shoe so that instead of saying ‘Waldies,’ it said ‘Crocs,’” explains Abramson. “Same mold, same factory, same exact product, just a different name. And the gentlemen’s agreement was that Crocs would sell to the boating industry.” Crocs took the shoes to the Fort Lauderdale Boat Show in November of 2002 and quickly realized the product had high potential.
Shortly thereafter, another seller named Holey Soles also approached Foam Creations, looking to focus on a broader fashion segment. Crocs began to sense both the opportunity and the pressure to expand. In any unsettled market with potential for high “buzz,” pressure to act fast can be quite strong. And the rewards for gaining first mover advantage can be huge, as they have been for Crocs. “Crocs saw where it could go,” says Abramson, “and they decided to go fast, far and no-holds-barred.”
Meanwhile, Foam Creations in Canada could not keep up with the demand generated by its three selling partners. “They had shoddy quality control,” says Raphael. “Nothing ever came out the way it was supposed to. You ordered green, but got pink. You ordered XL, but got XS.”
Crocs became so frustrated with demand not being met, that they decided to buy the manufacturer in 2004, Abramson says, freezing the other brands out. Holey Soles secured another manufacturer and Waldies joined in, but the formulation of the foam was all wrong – the friction bumps on the soles were too tough on your feet.
Meanwhile, Walden Kayaks had begun to experience financial trouble. The distressed company was purchased by Bill Hearn and his father-in-law, who were originally drawn to the kayak side of the business, but during due diligence began to realize the value was all in the shoes.
“Early on, I knew of the shoes, but didn’t really understand or appreciate them the way I should have,” says Hearn. “I saw my friends in the kayaking world wearing them all the way back to 2001, when they first came out. One friend of mine, an Olympic silver medalist in Athens named Rebecca
Gibbons was a really big fan of them and had been for a while. But I thought of them as unusual European clog-like styling and it wasn’t something I was going to put on my feet.”
But when Hearn began telling friends in the business that he was thinking about buying Walden Kayaks, they told him, “Those are the guys that make Waldies. Those things are amazing - you’ve got to try them on.”
So, at the Outdoor Retail Show in 2003, in the process of evaluating the company, Hearn wore a pair for a day and was amazed by the functionality and the comfort. He had been walking around on concrete floors for a few days in some really high end hiking sneakers, but put on the Waldies and his feet stopped hurting. “I wore them for the rest of the show and explored the viral nature and was really impressed by it,” he explains.
“I saw huge potential, but I also saw a style that was going to be tough for the majority of the U.S. population to embrace. I saw a material that was pretty amazing, but could be improved on. I set about trying to quantify exactly what it was going to take to make [Walden Kayaks] a success and I figured shoes were going to be easier to sell than kayaks. Even though kayaking is near and dear to my heart, there are 6 billion people in the world and they all have feet and would like something to wear on them that is reasonably priced, comfortable and durable.”
Soon after acquiring Walden Kayaks, Hearn’s bank (Bank North) was itself acquired and before the merger all small business loans were called. Hearn claims the loan call came at a particularly ill-timed moment in the seasonal company’s cash flow cycle. He still speaks with bitterness of the heartbreak he and his family experienced as they helplessly watched a 35 person specialty manufacturer get dismantled, but perhaps the loan call was a blessing in disguise, because it caused him to get serious and focus on where the real value rested within the company and how the company should be structured around that value center. At the bankruptcy auction, Hearn realized he was interested in acquiring just one thing – the Waldies brand.
A new dimension for Direct Dimensions
Hearn had one obstacle that accompanies bankruptcy, however – no money. So, he approached Raphael with an offer. If Raphael would bankroll the shoestring phase of startup, Hearn would run himself ragged getting the operation going. Hearn had briefly worked as an employee of Direct Dimensions and had also been a customer. At the time, Direct Dimensions had already been hired to do some three-dimensional modeling work for selling the shoes on the Web. “We knew we weren’t getting a dime out of it, so we looked at our options,” says Raphael. He admits to being very dubious. “We’re a technology company, so what, now we’re going to go into shoes? What are we crazy?”
But early on, Harry Abramson appreciated the non-obvious ways that Waldies could synergize with Direct Dimensions while diversifying the company at the same time. “We have a lot of opportunities as far as avenues for growth,” he notes. “One of those is to become a source of industrial design services. Another one is to become a developer of products for ourselves. Another is to learn how to deal with the retail market. It’s a risk, but if we take this product on, we’re going to learn a lot of things we already wanted to learn. This is R&D for Direct Dimensions, while at the same time, it’s product development for Waldies. If we can take shoes and make them 80 percent lighter and [the product] takes off, then what other products can we do that for?”
The answer to that question could be thousands of items long. The material Waldies are made out of is a trade secret – a foam called “Comfotek.” The Comfotek brand is merchandised just as prominently as the Waldies brand, similar to the way Gore-Tex is marketed on windbreaker jackets. The development of Comfotek is the real story behind Waldies. If you compare it to the many knockoff brands now popping up in the market in places like Wal-Mart and Payless, its superiority is obvious (the material used in the shoes at Wal-Mart feels more like Styrofoam). Besides being stronger, springier and more comfortable, the Comfotek material is anti-microbial, which keeps the shoes from smelling funkified by bare feet.
The uses for a soft, strong, durable, lightweight and comfortable anti-microbial waterproof material covers everything from the mundane (toilet seats and trash cans) to the specialty (bicycle seats and child safety seats) to the industrial (automobile and airplane interiors). Already, Crocs is manufacturing a second product line (kneepads) and its Foam Creations factory cranks out seat parts for kayaks and jacuzzi-type spas.
What Direct Dimensions adds to this equation is speed to market. The company can take a part made from some other material, scan it three dimensionally and have a fully transferable rendering in mere hours. “Stuff that five years ago took us three months to accomplish, we’re finishing by lunchtime,” Raphael brags. With speed like that on the design side, the trick would be finding fabricators with the capacities to scale quickly.
Neither Raphael or Abramson had the time to travel back and forth to Asia (Abramson made the first trip) and line up the manufacturing partner they needed. They could see that Hearn had the passion and market understanding to make the launch happen, so Raphael cut the check and Effervescent Inc. acquired all rights to the Waldies brand from the bank. He won’t say exactly how much they spent, except that it was less than $10,000.
Today that’s looking like a steal. I asked Raphael what month Effervescent Inc. would first turn cash flow positive. “What month is it? March? Umm…March.”
Not bad for a company selling a tangible good and whose website went active and began taking orders in January. On January 28th, a single order from the largest outdoor retailer in Japan brought a purchase of 32,000 pairs of shoes. Those shoes began hitting shelves in Japan in the last few days of March. Japan is the perfect cultural market for Waldies. Nobody there wears shoes inside and most people own several pairs of slip-on type shoes for walking into the basement, going up stairs or for bathroom floors. It’s a trend that’s being adopted somewhat in America as time-starved families discover they can vacuum less often if outdoor shoes come off near the door.
The key for the success of Waldies will be properly managing the supply lines and keeping quality control high. Waldies may be the first mover, but it didn’t secure first-mover advantage. That title clearly went to Crocs, which went public in February, achieving a $1 billion market cap and raising $200 million thanks to 2005 sales of $105 million. But Crocs is saddled with some problems that may have left the door wide open for a reliable competitor with a solid product.
The reputation thing
“Our goal is not to beat Crocs,” says Abramson. “Our goal is to do a good job with the outdoor retail market and create a brand that will remain solid.”
The outdoor retail market is a logical place to start for two reasons. The market is already familiar with the Waldies brand and remembers it as a first mover, plus the buyers appear to be fed up with Crocs. “They burned a bridge with the outdoor retail market,” says Raphael. “It left us a wide open opportunity. Our sales reps came to us with their jaws dropped saying they’d never seen a customer revolt ever – let alone one like this. I’ve never seen a whole industry say, ‘We hate you.’ [The buyers] think our material’s better. They like the design. They think it’s a better product.”
Needless to say, I’ve heard these types of claims before and always take them with a grain of salt. But in this case, there are reasons for Raphael to be optimistic. To check his claims about Crocs, I called Michael Hodgson, the editor of SNEWS, the online trade magazine for outdoor specialty retailers (a $7 billion market segment). Hodgson’s magazine gives Crocs 4.5 “hand claps” out of five when rating the shoes, noting that testers and consumers love them. His story changes dramatically, however, when it comes to the retailers themselves. SNEWS has an annual survey of specialty retailers that it has produced since the mid-80s, and while the survey is by no means scientific in nature, Hodgson claims that it has a “huge number of respondents” and represents the “crème de la crème” of specialty outdoor retailers across America.
“The survey includes two questions,” he says. “Who do you consider the best supplier to work with and who do you consider the most difficult supplier to work with? Crocs has been in the top ten the last two years and this year they ranked number one for most difficult supplier to work with. They didn’t garner one single vote for best supplier. And that’s significant, because in the footwear category when you look at the best-selling brands, Crocs is in the top five.
“So if you’ve got a retailer that is selling the heck out of a prod
uct, but is calling the supplier the most difficulty one to work with, that’s pretty significant.”
It obviously is significant and perhaps constitutes a weakness that Waldies may be able to drive a tractor trailer full of foam shoes through. But why would retailers dislike a manufacturer that sells so well? “I know full well why it’s the case,” claims Hodgson, who also asks respondents to justify their answers. “It’s lying to dealers; inability to ship product; inability to follow through on promises; consistently incorrect shipments. It’s just a nightmare to deal with them from a retailer standpoint.”
Hodgson even offers up a personal example of Crocs mismanagement. “Three years ago, we wanted two pair of Crocs sent to us, so two of our editors could test them. We ended up getting a box of 25 Crocs complete with a display to sell at our retail locations. Well, we’re not retailers are we? That’s consistently happened everywhere. We’ve heard of retailers ordering 20 pairs of shoes and getting 150. It’s absolutely ridiculous.”
Hodgson says that while there is no real buzz in the market segment yet for Waldies, he thinks the company will do just fine, because specialty retailer will respond well to a shoe sold only for them. “I think Waldies can do very, very well,” he says. “Will they do well on the scale of Crocs? Unlikely. Waldies may have developed the category, but Crocs, without a doubt, popularized it.”
Hodgson says the specialty retail buyers also will pay attention to the quality side when deciding whether to replace Crocs with Waldies. “The new Waldies look different and definitely feel different. If the price point is good and it’s an all-around better shoe offering a good margin for the retailer, then the specialty retailer is going to love to boot Crocs out of their store. They just need an alternative to be able to do it. That’s Waldie’s challenge. Can they fulfill the demand with these particular shoes, because stores like Uncle Dan’s are selling hundreds upon hundreds of Crocs.”
Competitive advantages
In the desire to grow as fast as possible, Crocs apparently allowed quality control levels to slip quite badly. Waldies also went through a similar period of supply-side frustration. But things can change quickly in the modern manufacturing world and Waldies appears to have cleverly used the circumstances of its own misfortune (getting frozen out of its supply arrangements by Crocs) into a potential competitive advantage. “Frankly, we’d had enormous problems getting Waldies in the right sizes, quantities, correct ship dates and consistent quality,” admits Hearn. “I was not pleased with [the manufacturing partners]. We brought on a Japanese distributor in the fall of 2003 and I had to go to the original factory a couple times to inspect the outgoing shipment and they ended up having to unpack the entire shipping container and unpack every single pair from every single box before it went out. I pretty much gave up on them at that point and came up with my own formulation for the raw material that was separate and distinct from the original formulation and had some real improvements to it.”
If it were not for years of manufacturing problems that became obvious to retailers, Crocs would probably be a much harder operator for Waldies to challenge, even in the niche of the specialty market. But in an effort to gain control of the supply chain, Crocs grabbed ownership of factories in Canada and Mexico that may wind up proving to be albatrosses compared to the partners Waldies has found in Asia. “When I started looking for manufacturing, I found a company down in Mexico that was Korean-owned,” explains Hearn. “It was my last chance in North America for manufacturing. Crocs had been in not very serious negotiations with this outfit to either get an exclusive deal or purchase the factory. I guess [my interest] was the impetus they needed to seal the deal, because before I could sign a contract, they’d purchased the factory. In retrospect, it was probably a good thing that we didn’t purchase the place, because I later came to learn that the machines are a lot older than advertised and there are some serious productivity problems with that factory.”
Foam shoes don’t seem like something that should be very hard to manufacture, but this kind of closed-cell injection molding has all kinds of issues associated with it
– the process is far more difficult than it looks and the proof is in all the knock-off manufacturers who turn out shoes with high defect rates and low durability. “There’s a little bit of black art to it,” explains Hearn. “If you don’t do it all right, starting from mold designs to the way the machines are set up, you’ll have incredibly high scrap rates. So there is a natural barrier to entry in the category, which we welcome. We now have a choice of several Asian countries to manufacture from and have a great manufacturing partner with decades of experience making components for the big sneaker companies.”
For now, Hearn’s strategy is to find a category and utterly please the retailers. “We’re interested in all the categories, but in order to have some controllable growth, we’re pretty happy with outdoor retail to start. We’re going to stay away from enormous chains.”
One ugly shoe
Another challenge Waldies faces is whether they will be regarded as a promising new category or a fringe fad product. The IPO of rival Crocs was quite successful, but the stock has declined from $28 to $24 in March amid concerns about whether new styles can “gain traction” with consumers. “That is the million-dollar question,” says Hodgson. “Do I wear my Crocs around town? Heck, no. I wear them in the garden or the yard to get the mail. Do I want to be seen wearing those things in public? No, they are butt-ugly shoes.”
Of course, Hodgson has middle-aged sensibilities that not everybody shares. For the teenage set, ugly shoes fit in nicely with the usual ensemble of inside-out shirts, wrong-size jeans and sideways hats. But it isn’t just teens that are wearing these shoes. The lightweight comfortable shoes are a hit with the elderly also, who need not bend over to put them on and off. Nurses and doctors are big fans also, because the shoes can be easily bleached without causing any damage.
For all these groups, the ugly factor is a secondary issue. The strategy of the company has always been to get people to try the shoes on. Raphael remembers when he was first introduced to the shoes. “I said, ‘You’ve got to be kidding me, people actually wear those? They’re the ugliest things I’ve ever seen.’ And then I put them on.”
For the last five years, this new industry segment has relied on the “and then I put them on” line as an excuse for lack of stylishness.
But at the end of the day, consumers still tend to prefer good-looking shoes over ugly ones. It’s an issue that both Waldies and Crocs appear to be ready to address. Abramson and Raphael showed me a prototype they’ve developed of a ladies slide shoe. It isn’t ugly at all and looks like a typical summer flat you might find in a department store. “Separate from the clog, we look at more conventionally functional and stylish shoes as the future,” notes Hearn. To that end, the company collaborated on that particular shoe model with Inna Alesina, who is a very well-known designer that used to do some work for 180s and lives in the Baltimore area.
Hearn tells a story of meeting a buyer who had been in women’s footwear for years and whom he expected to be quite jaded. “She put the shoe on and got this amazed look on her face and said, ‘This means freedom.’ I said, ‘What do you mean?’ She said, ‘This shoe, I can wear at the beach, I can wear it to work, I can wear to a function and it will fit in appropriately at all three and it’s incredibly comfortable and never going to hurt my feet. I don’t have to fool around with uncomfortable shoes anymore.’”
A few days after I spoke to Hearn, he was off to Asia again. The primary goal of his trip was to oversee the preparation of the mold sets for the next Waldies shoe model. The first new shoe model, of course, had only been available for sale for less than two months. This is the world of 21st century manufacturing companies, at least the successful ones: ultra-fast and ultra-lean.
Fast company
One. That’s still the number of people on the payroll of Effervescent Inc. The company will soon hire several more people, but for now, it’s as lean as a company gets. Currently, the customer service division of Direct Dimensions is also handling customer service for Waldies, but that will be the first function the new company insources back to itself.
Of all the things that astound me about the Waldies story, nothing astounded me quite as much as how the company was able to minimize risk so well and yet move so quickly. It’s a manufacturer with good supply chains, an existing customer base and a sales force that is quickly gaining global reach. There are no rich people behind the scenes here, just opportunists who think they might see daylight. It’s likely that many consumers (and even some retail customers) may never realize that the company was sold, went through bankruptcy, reorganized, completely redesigned the product (including the base material) and moved production to Asia.
“It’s the new world,” says Raphael. “It was part of the selling point when Bill came to me with the venture. The thought was that we could be a very large company very quickly, without necessarily taking on all the risks. The sales reps are all pay on pay – they get paid when we do. We’re outsourcing sales, manufacturing, logistics, warehousing and fulfillment, as well as design [to Direct Dimensions].
“We’re thinking about outsourcing some ownership, if we can ever figure out how to do that,” he adds laughing.
“It’s not unusual in footwear to sub a lot of things out,” notes Hearn. “I think what’s unusual is that we’ve done it on a shoestring with very few employees. I’m lucky that my knowledge base all came together here, including things I learned from Michael and kayak manufacturing, such as formulating resins for kayaks and paddles. Without this crazy mixed bag of engineering, chemistry and manufacturing management experience, I don’t think it would have been possible. I’ve been blessed in that way.”
Of course, the need for future capital infusion is likely and apparent. I asked Raphael if there were any other investors besides himself and Hearn. “At this point it’s still friends and family and very small,” he admits. “There will be a point at which it makes sense to go get a couple million dollars. The question is at what point we will be large enough to justify a large infusion without having to give up control of the house.”
The good news for Raphael is that as the company is currently configured, Effervescent can make profit at nearly any amount of sales volume. According to him, the retail margins on Crocs are 57 percent and Waldies pricing is currently identical (Waldies set the original price, historically). The company may find downward pressure on prices if underpriced inferior products from Wal-Mart manage to attract large numbers of uneducated consumers who can’t discern a difference. He knows that marketing costs will eat at profits also, though the company thinks it will benefit from anticipated Crocs marketing efforts that will introduce the category to millions of people for the first time.
Whatever the summer of 2006 brings, with Crocs fresh off its IPO, knock-off brands hitting big discounters and Waldies back from the dead, it’s likely to be remembered as the year ugly foam shoes hit the mass consciousness. It will be a fun experiment for an Owings Mills company named Direct Dimensions that is learning new lessons as it goes along. The more I learned about it, the more I realized that no matter what happens, they really can’t lose.
I wrapped up my journey into the Waldies world on March 31 with a visit to “Harrypalooza,” Harry Abramson’s 40th birthday bash at the 8 x 10 in Federal Hill. Live bands, people dancing and a few colorful Waldies shoes here and there. I surveyed the Waldies shoes and couldn’t stop Abramson’s earlier words about the future potential of the Comfotek material from repeatedly bouncing around my brain: “Hey, this is all just R&D for us.”
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