Corporate watch: Croatian shoemaker in need of repair

By Guy Norton of bne

Shoemaker Borovo was once the second largest company in Yugoslavia, employing 23,000 people, producing 23m pairs of shoes, 580,000 tyres and 12,500 tonnes of rubber goods a year, all exported around the globe.

Based in Vukovar, Croatia, it survived the city’s 1991 bloody siege, despite suffering damage totalling an estimated €300m. Now it is facing another battle for its existence, this time in the face of an onslaught of cheap imports from Asia.

Hrvoje Merki, who took over as chief executive in March, describes Borovo as an “iconic company” for Vukovar, with over half of the firm’s remaining 1,100 workers employed in the city. But, as Merki admits, the company is now a shadow of its former self, now focused mainly on shoes and boots.

In the past few years, the company has become notorious for racking up losses – it last made a profit in 2004, and in 2011 racked up a loss of 21.5m kuna (€2.86m), up 363 per cent from 2010, on sales of 182m kuna.

Former chief executive Mirko Cavara, who ran the company from 2006 until he made way for Merki earlier this year, attracted criticism when Croatian daily Jutarny List reported in 2009 that he had purchased expensive limousines and was getting workers at Borovo to build him a 10-metre long yacht – all this at a time when the 100-per-cent state-owned company’s financial fortunes were sinking deeper into the red.

In his defence, Cavara claimed that as the leader of a major state enterprise it was
appropriate that he should drive an expensive car and that he had commissioned the yacht as an experiment to see whether Borovo could diversify into shipbuilding. Cavara’s 500,000 kuna VW Phaeton car has since been sold to fund his redundancy package.

Small wonder that Borovo has often been tipped to join other one-time major industrial enterprises from Yugoslav-era Croatia such as engineering firm Jugoturbina and components company Jugoplastika in bankruptcy. Yet Merki is determined to disprove predictions of Borovo’s imminent demise with a root-and-branch restructuring of the company that he hopes will return it to profit and secure a sustainable future for Borovo’s remaining employees.

“Borovo has the capacities, the know-how and the logistics to be the market leader in the shoe business in Croatia. The only thing that has to be done is to manage all these resources effectively and wisely,” Merki tells bne.

However, he is under no illusions about the size of the task that lies ahead of him, given the alleged mismanagement that preceded his appointment this spring. “I was very shocked by the unreasonable management decisions of my predecessors, which led to the situation that Borovo finds itself in today,” he says.

Merki cites Borovo’s own footwear stores as an example of past irrational management decisions. “It’s strange that only 22 per cent of the shoes and boots in our own shops are from Borovo, while 64 per cent are from China and 14 per cent from [other companies in] Croatia, most of them from Borovo’s direct competitors.”

And that’s not because of a lack of product. “We have huge amounts of finished products in our warehouses that have remained unsold for years, in fact for almost a decade.”

One of Merki’s first moves when he took the helm at Borovo was to commission a full-scale audit of the eight companies that form the Borovo group to help the new team can formulate a comprehensive recovery plan to help turn Borovo’s financial fortunes around and create a profitable business that could eventually be privatised in a number of years.

“The vision is to transform Borovo from a manufacturing company into a marketing-driven company, producing only what the market demands, while at the same time opening up new markets and market niches.” For example, Borovo is preparing to launch a range of specialty protective footwear for use in the oil and gas industry, which Merki believes will have global appeal.

Among the reasons for his upbeat view on the firm’s prospects is the fact that the company has an estimated €40m worth of confiscated real estate in other former Yugoslav republics, principally Serbia and Macedonia, which it is seeking to reclaim or to secure compensation. At its peak, Borovo had 600 stores across the former Yugoslavia.

Recent press reports indicate that after years of wrangling, the Croatian and Serbian authorities could announce a landmark settlement relating to such issues as Borovo’s stores later this year. That would help the company get over its war-torn past.

Related reading:
Croatia’s shipyards: clock is ticking, beyondbrics
Croatia’s crackdown hits foreign investors, beyondbrics
Croatia contracts 1.3% in first quarter, beyondbrics
Serbia and Croatia: no love lost, but money to be made, beyondbrics