Joyce Groote, of Holeys.
Joyce Groote holds up a plaid-lined ankle boot. From a few feet away, it could pass for fashionista fare, the plaid a cheeky accent underneath a pair of designer denims. Touch it, though, and the surface has the familiar sticky smoothness of those ubiquitous foam clogs, stashed in millions of mudrooms and favourites of everyone from TV chef Mario Batali to ex-president George W. Bush. The material has also been fashioned into sandals, heels and rain boots, but Groote, president and CEO of Holeys, insists that no other company has yet made an ankle boot. Certainly not Crocs.
The mention of the company causes interesting changes in Groote's classically beautiful face. Her jaw sets, her eyes deaden. A 52-year-old woman of polite, reserved charm, she visibly stiffens. She even puts down the shoe she's been toying with, as if to free her hands for a skirmish. Crocs, you see, is the evil empire to the more than a dozen much smaller foam-clog makers like Holeys – which claims to be No. 2 (though, admittedly, a distant second) in the world. And Groote has a unique reason for rancour. Her Richmond, B.C.-based company has been selling foam clogs just as long as Crocs; in fact, both firms originally marketed similar shoes under different brands.
Yet, within four years, Colorado-based Crocs grew into the second-largest footwear manufacturer in the U.S., more than 100 times Holeys' size, and became synonymous with the category. What's more, Crocs has used its wealth to repeatedly sue its rivals, claiming to hold patents that make everyone else's clogs illegal knockoffs. The fact that rulings have gone substantially against them at each step along the way only reaffirms its competitors' conviction that the intellectual property in question is, well, a crock.
On this hot mid-June day, Groote would rather talk about Holeys' recent reinvention after the runaway clog bandwagon slowed to a crawl. It has been a bumpy ride. From 2004, when Groote took over, the company's revenues grew exponentially – $60,000; $600,000; $3-million; $11-million; $17-million. These kinds of annual growth rates derail many start-ups, as demand vastly outstrips supply and there's never enough time to plan ahead. "You don't see them, but there are a number of scars on this body," she says, leaning forward confidingly and offering an exhausted smile.
By 2007, however, controlling growth stopped being a problem. Inventories piled up. And all the Croc haters triumphantly announced the end of an abominably ugly fad. Holeys, Crocs and others suddenly had to rethink their businesses amid a rapidly deteriorating economy. The fruit of that process at Holeys started to appear last summer–new product lines, a new distribution model and a tighter focus on a few consumer niches, all under a new brand (until last year, the company was called Holey Soles). In fact, Groote says her now much-smaller company is no longer about footwear but about the proprietary foam, and the many innovative products it can make out of that material.
Groote doesn't pretend that the strategy will make up for dwindling sales. But for companies that thrived off the craze, the new directions will determine who – if anyone – can turn a footwear fad into an enduring business.
Shoes invented in Canada
The genesis of the foam clog is murky. The most widely cited story sets its roots in Canada in 2000, when Finproject NA, a Quebec City manufacturer of industrial foams used in everything from tricycle tires to swimming-pool accessories, commissioned an Italian designer to develop foam shoes for spas. In the spring of 2002, several sharp-eyed entrepreneurs–three Colorado golfing pals, as well as a Vancouver psychologist named Anne Rosenberg – independently saw an opportunity to distribute the clogs.
"It was the perfect material for footwear," says Groote: resistant to bacteria, washable, buoyant, feather-light and very comfortable. "The world loved and hated the shoes all at the same time." In early 2004, Groote was approached by Rosenberg, her next-door neighbour, for help in growing the business, and a loan. Groote at first seemed an odd choice. A geneticist by training, she was the former president of Ottawa-based industry association BioteCanada. After she famously got pied in the face by an activist protesting genetically modified foods, Groote decided she'd had enough controversy, and moved to the West Coast. She and her husband, Rick Walter, had their eyes on a Vancouver business. When that fell through, she started consulting and raising money for local biotech start-ups.
The couple initially invested $80,000. Then, in late 2004, seeing a diminishing window of opportunity and frustrated with the glacial pace of decision-making under multiple shareholders, they bought out Rosenberg. (She still lives next door, but has no business involvement with the Grootes. "It was always a cordial relationship, but we were never close," says Groote. Subject closed.) Finding herself in charge of a company with $65,000 in revenues and one employee, Groote wrote a new business plan targeting a rapid expansion. When Finproject, which had added several other distributors, started having trouble keeping up with demand, Holeys decided to have the shoes manufactured in China. Groote–well versed in intellectual property law from her days in genetics research – first verified there were no patents or other IP restrictions on the clogs or the foam.
Although Groote had an MBA in marketing, she knew zilch about footwear. "[Rick and I]had to learn everything," she says. The couple, who met when their two organizations merged to become BioteCanada, were used to Groote running the show; Walter had briefly been her No. 2 at BioteCanada and on subsequent ventures, and now serves as VP of operations at Holeys.
The early days were all about keeping up with demand, which grew exponentially. "It felt like you could never completely catch up," Groote recalls of that time. "There were always things screaming at you to be done." She remembers learning in the summer of 2005 that the first Chinese manufacturer, brought in by one of the former shareholders, could only make 800 pairs a day. "Which was nothing!" she says. It would be so excruciating, because orders would be piling up and we'd know that container was already spoken for before it even got to Vancouver." She promptly ditched the manufacturer and found a replacement in China that was willing to grow as needed to meet demand. The new company also helped Holeys tweak the foam formula to give the shoes a snugger fit.
With the shoes designed in British Columbia, manufactured in China, then sold in as many as 40 countries through independent distributors, it proved immensely important to pick channel partners that could both creatively cultivate, and efficiently supply, demand for the Holeys brand. Because, while Crocs called its shoes Beach and sold them for $30 and up, and Holeys offered Explorers at a slightly lower price, they looked virtually identical to unschooled eyes. Besides, the market was soon flooded with much cheaper, no-name varieties that sold for a few dollars at discount stores. Crocs, powered by millions of dollars in private investment–much of it spent on marketing–had become the de facto brand, so when pitching its wares to retailers and consumers, Holeys (which Groote and Walter always bootstrapped alone) leaned on the price difference, the better fit and, in Canada, good old patriotism. Nevertheless, by the end of 2005, Crocs had sold six million pairs of shoes–three times what Holeys would sell in its peak year of 2008.
The two companies fought fiercely for market share. Lani Atkinson, co-owner of two Sproutz Kidz children's clothing stores in Calgary, recalls contacting Crocs about carrying its kids' shoes and being told the shoemaker had too many local retailers already. "As soon as we got Holeys in, Crocs called us back," she recalls.
Shortly after Groote joined Holeys, she says the Colorado company suggested the two brands stay out of each other's backyards: Holeys would sell in Canada, Crocs would own the U.S. and the world. When she declined, in June, 2004, Crocs bought Finproject – with, Groote dryly points out, the "nice and generous support" of several million dollars in foreign-investment assistance from the Canadian government – and then terminated its supply deals with all its distributors. It also patented Finproject's "proprietary closed-cell resin" under the name Croslite.
That's when Crocs changed strategies, too. In late 2004, Groote received a warning that it was infringing on Crocs' copyright on the shoe. Initially, Groote says she tried to settle the issue amicably. She met with Crocs executives, including then-CEO Ron Snyder and, as she puts it, "we suggested we could find a different way to compete."
The result? Groote offers a tight smirk.
"Big smiles all around. He [Snyder]didn't say anything." (Crocs didn't reply to repeated requests for interviews.) Thus began an epic, multipronged legal battle that continues to this day. Holeys' lawyers persuaded authorities in the U.S., Canada and Europe to prevent or invalidate Crocs' patents, in part by proving prior existence of the foam clogs. Crocs appealed the rulings and lost, but is continuing to fight. Meanwhile, Crocs took Holeys and 10 other manufacturers before the International Trade Commission in the U.S., claiming patent infringement. Having lost that case too, it's now appealing to the U.S. Federal Circuit. "It's a litigious company," says Groote. "It's part of its DNA. The point isn't about winning; it's about sapping [competitors']resources and diverting focus. I was determined not to let that happen."
The legal war has cost Holeys a million dollars to date. Robert Storey, an intellectual property lawyer with Bereskin & Parr in Toronto, is skeptical about the merits of Crocs' case. He compares it to Lego's battle with Montreal's Mega Brands, maker of Mega Bloks: Lego argued that aspects of its brick had become so distinctive, they functioned as a trademark. In more than a dozen court cases, judges disagreed. At the same time, Storey sees the foam-clog wars as an example of how a simple product can create a complex IP case, because it crosses various categories of rights, from patents and trademarks to copyright and industrial design registrations. "The lesson is, if you're in a fashion business, you should have a strategy to file [applications to protect your IP]on a timely basis," he says.
Crocs' rivals can take consolation in that company's disastrous recent fortunes. In November, 2007, its shares shed half their value after quarterly results warned of slowing sales. The company, worth $6-billion (U.S.) at its stock's peak, had expanded manufacturing in anticipation of more good times ahead. Amid rising inventory levels, mounting debt obligations and allegations of insider trading, the shares slid as low as 79 cents (U.S.), and the company flirted with bankruptcy. All clog makers have seen sales drop, but Crocs had made the biggest investment, had reaped the biggest profits, and now faced the biggest disaster as people decided they'd had enough of foam clogs.
Not much time for navel-gazing
A small office near the warehouse in Holeys' 85,000-square-foot complex in Richmond is a three-dimensional chronicle of the company's quest for the next big thing. The so-called development room is packed to the ceiling with all types of experiments: foam sneakers, boots imprinted with ladybugs and paw prints, shoes with leather patches and laces, inserts and linings. There are also bags and kneepads, coasters and hats. Most are prototypes and test runs, and will never leave this room. Groote points to a pair of sandals, one of the company's early misfires. She's still not sure why they failed. "There's not been a lot of time for navel-gazing," she says.
Every product here is made out of SmartCel, Holeys' version of the foam (a trade secret, like Coca-Cola's recipe). It looks and feels the same as any other foam product, but Groote says it's more durable and doesn't crinkle like other varieties after repeated bending. She points to another Holeys innovation: a slip-resistant sole tread, now applied to all of the company's footwear. "It has to be glued in, but one of the things about SmartCel is, nothing sticks to it," Groote explains, twirling a hot-pink kid's clog over her hand like an old-time cobbler. "We had to fuse the rubber sole to the SmartCel," a process that's also a trade secret.
Groote leads the way to another room that displays the Critters children's line. When Holeys started making kids' shoes in late 2006, each size was given a bug's name. A graphic designer on staff turned them into characters with personalities: Buzz, the chubby beetle; Flash, the firefly whose butt lights up when she's embarrassed. ("I have a funny feeling one of these characters may be me," says Groote.) The company started embossing the characters on shoes, then added colouring books and crayons. Now, it's expanded to hats and knapsacks.
The company started looking beyond the clog almost three years ago. "We always knew this was a fad, that the lifecycle would reach maturity," Groote explains. Holeys first tried offering collections–matching sets of flip-flops, bag and hat–but the approach didn't work with larger retailers because each item had separate buyers and was displayed in different parts of the stores.
So Groote got more methodical, analyzing Holeys' customer base. Most sales were coming from specialty stores catering to niches, not from shoe stores. "It was a good awakening for us," she says. Kids represent half of Holeys' sales; gardeners and duty professionals, such as nurses and restaurant workers, are both loyal groups. She decided to focus on those three segments, along with what she calls the Let's Play leisure line, a category of women's beach and casual wear.
To cater to these vertical markets, however, she needed new salespeople who were well connected with relevant retailers, as well as people who could gain access into the larger chains, such as Sears and Home Hardware. So, last year, Groote led a restructuring, starting with the name change to reflect an expansion beyond holey clogs. She's revamped the sales force and brought in new distributors. The plan, she says, is to serve those select buyers with new products incorporating SmartCel foam–kids' backpacks, sun hats and bags–although comfortable footwear, from sandals to boots, will always be the company's base. The Coastal ankle boots, for example, were first designed for gardeners, but Holeys has added customized versions to its other lines.
Still, when sales slumped in the spring of 2007, it didn't immediately ring alarms. She was still projecting 30 per cent growth for 2008; instead, revenues plunged. She won't reveal by how much, but Crocs' sales dropped by a third that year. Ron White, who runs a footwear chain in the Toronto area, says retailers found the speed of the drop shocking, leaving them with mountains of unsold clogs. "It was like a light switched off."
'Big into planning'
Groote has learned a lot since her days as a footwear ingenue, and her talk is occasionally sprinkled with manufacturing arcana. But she's fundamentally a strategist who has relished navigating a rapidly growing company on its roller-coaster ride. "She's big into planning," says Kari Yuers, the CEO of an industrial materials manufacturer in Vancouver who's part of a local entrepreneurs' group alongside Groote. Last year, Holeys laid off a third of its staff, and now has about 20 people, down from a peak of 70 working around the world. Yet, says Yuers, there are "no ruffled feathers." "She's had to manage almost the complete restructuring of the business," Yuers adds. "With her success and notoriety, it's tempting to not show your scars."
It's easy to see that bit of steel behind Groote's soft, blond looks.
"I'm determined," she says simply. She and her husband both work 10- to 12-hour days, and they like it that way. "We do try to take weekends off and, for me, on average, that means I work only three hours," she says. Her goal is to grow Holeys into as big a business as possible, something she finds isn't a priority with many women entrepreneurs, who are happy to reach a level of success, then pull back to retain time for family. (Groote has no children, and Walter's, from his previous marriage, are grown.) "I think women place limitations on themselves," she says. "The glass ceiling in many cases is in the mind of the person, not an actual limitation. I sometimes think women don't dream big enough, sometimes there's a lack of confidence."
Groote is counting on the miracle foam retaining its draw for consumers, but it's unclear yet whether foam footwear will follow the trajectory of Earth shoes, a fleeting fad in the 1970s, or be more like sneakers, a category with seemingly endless opportunities for innovation. Catherine Cook, who runs Kamik, a boot manufacturer based in Montreal that's led the colourful rain boot craze, says, "People are looking for comfortable footwear. There's definitely an ongoing trend of easy-on, easy-off."
Groote's strategy seems pegged to riding population trends: Belt-tightening boomers, she points out, are focusing their energies closer to home and flocking to gardening, for example. But, seated in her office beside a poster announcing "Life's better at the beach," Groote herself seems far from ready to start taking it easy. Is she angry about Crocs turning Holeys, in the world's mind, into a knockoff brand? "I used to be," she says resignedly. "They had more money for marketing, what can I say." Even if Holeys could have spent more on promotion in the early years, "it would have been a drop in the bucket." What she doesn't say is that the Colorado company's marketing investment helped develop the whole category, greatly benefiting its rivals.
Now that foam clogs are not just uncool but unpopular, and with Crocs continuing to struggle – its expansion into more fashionable shoe styles and golfing gear has seen mixed results, and its clothing line, launched in 2007, bombed – Groote is keen to distance herself as far away from her rival as she can. The two companies are chasing different consumers, says Groote. She claims to not even view Crocs as a competitor. "The only similarity between Crocs and Holeys footwear now is that they use similar materials to make very different products."
As for the original Holeys Explorer clog that was at the core of all the litigation? "We don't even carry it. We're clearing it at a warehouse sale," she says. "We're not the same company that we were."
How to stay on the fast track
Joyce Groote's adventure in helping to drive the foam-clog trend has given her some hard-won lessons for managing a rapidly evolving business: Pick channel partners carefully: Make sure, Groote advises, that international distributors have ample warehouse capability, financial backing to make the investment in inventory, and are insured by Export Development Canada so they won't default on financial commitments. She also advises having a contract prohibiting them from going into business as your rivals. One of the first distributors Holeys signed, in Australia, ended up using the company's money to set up as a competitor. And verify that they have the kind of reach they claim. "Every distributor wants exclusivity for a whole country," she says. "Well, prove to me you've got a sales force that can deal with [various vertical markets] They never can." Importantly, Groote looked for distributors willing to be true champions of the brand.
Understand your partners' business culture: Groote learned early on that her Chinese partners had a different understanding of commitments. "You ask them if they can do something, they always say yes. The people in China just don't like to say no to you." Finding this to be true across various Chinese companies she's dealt with, she has learned to account for that in her planning.
Find partners who'll grow with you: Holeys' first Chinese manufacturer wasn't willing to invest in expansion to keep up with rapidly escalating demand. "We were always pushing them to get more staff, more equipment," says Groote. "But they were doing [our shoes]as something on the side." She quickly switched partners, and wishes she had personally visited the first plant before the deal had been signed.
Raise money when you don't need it: Holeys worked closely with its banks and sought financing for expansion before it was urgently required, applying the timeline set out in Groote's business plan.
Manage the growth: While most foreign distributors source directly from China, Holeys decided early on to run its own warehouse operation in North America (except for some niche retailers, who were supplied by specialized distributors). A major consideration in that decision was having the ability to prioritize clients when the demand outstripped supply. Holeys made sure to supply its existing retailers even if it meant saying no to new distributors or stores.