Fila trying to step forth

THE BALTIMORE SUN

Looking out over Midtown Manhattan from Fila's New York showroom, Jon Epstein sees opportunity.

With smart positioning, Fila, the Italian athletic shoe and sports apparel brand long considered a poor stepchild in a world dominated by Nike and Adidas, can become a must-have for the hip, style-conscious types who fill Bryant Park below, making it one of the five top athletic brands worldwide, Epstein believes.

"American ingenuity, American financing, American vision can really aid in turning this company from what was once just an Italian sport brand into a great global sport brand with an Italian heritage," said Epstein, chief executive of Sparks-based Sport Brands International, which acquired Fila from an Italian parent company for $351 million last month.

Epstein points to indications that a rebound is under way. The U.S. unit he headed for five years, which lost more than $140 million in 1998, is breaking even. Upscale department stores such as Barneys and Marshall Fields are stocking Fila products for the first time. Next spring, Fila ads will be back on television after a four-year absence. U.S. sales in the first five months of this year rose 5 percent to $82 million.

Fila's new owners face daunting challenges, however. Globally, the company has struggled with sinking sales and rising debt. During the first quarter, which ended March 31, Fila's worldwide apparel sales fell 15 percent while footwear sales plummeted 27 percent.

Fila faces formidable competition: Giants Nike, Adidas, Reebok together control more than half of the $18 billion athletic footwear market, and Nike has sales of $9.89 billion. Fila is far outgunned, too, on the all-important marketing front. It has a global marketing budget of $70 million; Nike recently signed a single endorsement, with a high school basketball player, for $90 million.

And all of this at a time when a maturing athletic footwear industry is not experiencing much growth, analysts said.

"Fila is up against some heavy competition," said David Campbell, a retail analyst with Davenport & Co. in Richmond, Va. "They've had some execution problems and obviously don't have a strong brand name."

Epstein and his partners in SBI say they'll be taking the same kind of steps that helped stabilize the U.S. unit. Since coming from Adidas to head Fila USA in 1998, Epstein and his team have cut about $110 million in expenses by consolidating operations and closing warehouses.

No more inline skates

They got the company out of less-profitable businesses, such as making inline skates, basketballs and baseball gloves; tightened control of inventory; closed some outlet stores; and began refocusing the brand on its tennis and basketball roots. Part of that strategy included sponsoring a few prominent athletes, such as tennis star Jennifer Capriati.

Epstein's new partners in SBI include Tom O'Riordan, former chief operating officer of Fila USA, now heading Fila Americas in Sparks; Robert Galvin, who is heading Fila Europe from Biella, Italy; and Gene Yoon, the founder of Fila Korea, which has 400 franchise stores there, who will oversee Fila Asia.

"We think we can do a good job," Epstein said. "We have good managers, and we have people we're bringing into the company ... that worked for global companies like Adidas or Nike and understand what it's like to build a brand around the world."

In the early to mid-1990s, Fila hit it big when the popularity of its footwear and active apparel spread from inner cities to the suburbs and basketball shoes endorsed by Detroit Pistons star Grant Hill sold millions. Fila fell out of favor when consumer tastes shifted and competition intensified. Now, SBI is hanging the brand's re-launch on Fila's Italian heritage, which, it says, will allow it to stand out as the sports brand with style.

Fila's new managers hope to create the same buzz that the brand had nearly three decades ago when tennis star and Fila endorsee Bjorn Borg shook up the tennis apparel category. At the time, tennis apparel was usually white, but Borg wore Fila designs, a white shirt with a vertical stripe and contrasting blue collar made from a body-hugging fabric.

"It's about style, which is different than fashion," said Mark Westerman, vice president of marketing communications for Fila. "Fashion is fickle. Fashion is a fad and changes, but style is something we bring to the table that distinguishes us."

Fila believes that style will catch the eye of teen-agers, who buy the bulk of athletic shoes and clothing. For that age group, "it's all about looking good and feeling good," Westerman said.

But skeptical analysts say that means Fila will need to find the pulse of the consumer to put right mix of products in the right stores.

"The trends have been classic and retro European types of shoes, and as far as I can tell, Fila hasn't had a strong product offering in those categories," Campbell said. "They need to come up with a hot shoe, and they need to get some distribution, and that's not going to happen overnight."

Epstein said that now, as head of an independent company, he has more freedom to solve Fila's problems, including the lack of product focus he blamed for sagging sales. With a too-broad assortment across too many categories - selling more than one type of basic fleece sweatshirt, for instance - the company was "trying to be all things to all people," he said.

In addition, $325 million in debt hampered Fila's flexibility. But SBI's deal with Fila's former parent, Italian media conglomerate Holding di Partecipazioni SpA, eliminated that, Epstein said.

After HdP had tried unsuccessfully to sell Fila for two years, the managers of the U.S. subsidiary, backed by investment fund manager Cerberus, were able to persuade the Italian parent to sell to them for an amount based on the financial debt plus minority share obligations.

Key hires possible

With a debt-free company, the new managers are able to make key hires, invest in products and materials research, and reopen bank lines of credit to get products manufactured on schedule.

They'll be able to boost advertising, place new orders for the shoe molds on which designers and engineers rely to launch new shoes and reorganize the design, engineering and marketing teams to work together more efficiently.

SBI has begun assembling a team of seasoned athletic shoe and apparel executives, including a new senior vice president of global footwear, former Adidas executive Mikal Peveto, 41.

Peveto, a former Nike-endorsed distance runner who describes himself as a longtime shoe junkie, has worked for Nike and, most recently, for Adidas, where as global senior product manager for running, he helped boost Adidas' running category from a $79 million business in 1993 to $1 billion in 1999.

In the past few weeks, Fila has hired a new U.S. vice president of footwear sales, a U.S. vice president of apparel sales and a vice president for business integration.

It also plans to reorganize the global structure, basing products' design and development in the places where those functions make the most sense. Skiing and motor sports will be based in Europe, for instance, while basketball, running and tennis categories will be primarily in the United States, split among Sparks, New York and a research and development plant in Peabody, Mass.

Though the consolidation is likely to reduce the number of employees overall, the changes could boost jobs in the Baltimore area, where 250 people work in Sparks and at an Anne Arundel County warehouse. The bulk of the design and development of Fila footwear, for one, will shift from Italy to Sparks and be headed by Peveto, who said the focus will be on distinguishing Fila from competitors.

SBI also plans to redistribute the marketing budget, putting its resources into the more traditional sports that can generate more sales - tennis, running, basketball and soccer - as well as into "lifestyle" products that are inspired by, but not necessarily worn for, sports.

Besides the coming television campaign, which will feature a retro '70s and break dancing theme, Fila is increasing its print ads in magazines such as Maxim, Gotham and G.Q. and backing up those campaigns with events featuring celebrities in Fila apparel.

Fila's new owners could have timing on their side, one analyst said

"People are looking for a new, up and coming brand to rediscover," said Marshal Cohen, a senior analyst with the NPD Group, a Port Washington, N.Y., market information company. "What Fila is going to need to do is to get into the big pool with Nike ... Adidas, Reebok and other brands. ... Fila is going to have to create a unique position in the market to separate itself from the rest of the pack. They all have to stand for something. You can't all buy the best athletes."

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