DEARN SHOES LTD

Summary of SBL Preseen Jun 2025

By Sir Hasan Dossani @ VIFHE
(WHATSAPP +971 55 524 5672)

Colour Code:
Strength or Opportunity Weakness or Treat Important information
GREEN FONT RED FONT YELLOW SHADE
 COUNTRY / INDUSTRY INFORMATION
Industry Overview
- Dearn is a company which manufactures and sells shoes in Lucland
- Lucland is a developed, politically stable country
- Companies manufacture adults’ and children’s shoes in factories or smaller workshops and sell them to
customers in Lucland via their own retail outlets or online stores.
- Export sales are made to customers in other countries via distributors
- Shoes were traditionally made from original leather but now a variety of cheaper man-made materials (such
as synthetic leather) is also being used extensively in shoe manufacturing
- Average industry revenue is $ 3.75 billion
- Annual historic growth is 1.7% and forecasted annual growth is 1.06% (future growth is slowing down)
- Market is dominated by 5 companies who collectively holds 45% of the market share (Rigo, Flamingo, Dearn
Parrish, and Betterby).
- Rest 55% of market share is shared amongst 200 smaller companies (Avg 0.3% share per company)

Production
In Lucland, shoes are produced in two ways:

MASS PRODUCTION
- Mass production involve use of machines to manufacture, with human supervision
- High usage of synthetic leather
- Some Lucland manufacturers have outsourced their production to third-party manufacturers in cheaper
countries

HAND CRAFTED SHOES

- Shoes are produced by hand using skilled labour
- Usually made from original leather and are admired for their very high quality and craftsmanship
- They are more expensive to produce because of high quality leather and higher proportion of skilled labour.
They are therefore sold at a higher price than mass-produced shoes
- The production of handcrafted shoes has not been transferred outsourced to other countries and they
continue to be manufactured in Lucland
Types of Shoes

Type Customer Material Production

Formal Adults Leather Hand crafted

Semi - Formal Adults Mix of Leather and synthetic Mass produced

Casual Adults Synthetic Mass produced

Children Children Either leather or synthetic Mass produced

Market structure
Sales channels
Physical
- Through own branded retail outlets (physical)
Online
- %age of online sales in Lucland is increasing since last 10 years
- No online sale outside Lucland (international opportunity)
Exports
- Lucland shoes have excellent reputation worldwide for its quality, specially hand crafted shoes
- Increase in demand for hand crafted shoes in other developed countries in recent years
- Export sales are made via distributors

Industry Challenges
Competition - Customers are buying shoes more frequently to keep up with regularly
changing fashion trends
- Speed to market is becoming increasingly important (from mfg to outlet)
- Flamingo leads in speed to market by responding quickly to changing
fashions and manufacturing / launching new designs in just few weeks

Falling disposable income - Disposable income affects the demand and frequency of shoe purchases
- Lucland economy has slowed down from 5.1% five years ago to 1.1%
(20x4)
- 2025 forecasted growth is 0.8%
- Due to economic slowdown, demand for mid price shoes is falling and
demand for low price shoes is increasing
- However it is forecasted that there will be growth in hand crafted shoes
due to high demand in other countries (export) and niche or patriotic
customers in Lucland

Customers boycotting - Growing number of customers are unwilling to purchase shoes

shoes manufactured manufactured outside Lucland (due to bad employment practices in those
outside Lucland countries and negative impact on environment due to shipping)
- They prefer buying expensive shoes which are made in Lucland and which
showcase Lucland heritage and craftsmanship, even though their
disposable income is falling
- This has led to an increase in demand for hand crafted shoes
- This also led to high demand for skilled labour and attracts new entrants /
competition in hand crafted segment

Environmental impact - Shoe manufacturing causes significant emission / CO2 release

- Shoe industry contributed 1.4% to global emission
- Hundreds of thousands of shoes are disposed of each year which takes
years to biodegrade (no proper recycling)
 Number of returns from - A large proportion of the shoes purchased online are returned (mostly
online purchases because they do not fit properly size issues). There are no universal foot
sizing standards
- Many retailers do not charge customers for return shipping charges if the
shoes purchased are not wanted

Innovation and developments

- Growing public awareness about environmental sustainability and ethical standards have led to
development of “ethical shoes” manufactured using expensive eco-friendly sustainable materials which
have been ethically sourced
- Recycling initiatives are being tried by shoe manufacturers in other countries but no significant development
in Lucland
- Use of technology in R&D and designing for example, 3D printing can be used to produce prototype designs
- “Intelligent” shoes which can measure fitness, health metrics and provide data to a smartphone
- Virtual and augmented reality technology is being used for online sales to enable customers to ‘try on’ shoes

Industry body, industry standard and legislation

- Lucland Shoe Association (LSA) aims to promote the industry by providing expertise, support, advice,
guidance, government relationship, etc
- Accreditation by the ‘Made in Lucland’ (MIL) campaign indicates that manufacturers have complied with
standards regarding the quality and safety of products, labour standards and sustainability guidelines
- Compliance with employment, health and safety, consumer protection, competition data protection
legislation
- There is a strong system of copyright protection in Lucland
- Manufacturers must carry out a number of legally required health and safety tests on all shoes to ensure the
materials used to manufacture them are non-hazardous
- Most staff employed in the industry are members of the National Shoe Union (NSU), which looks after the
interest of its members (Trade Union)
 COMPANY INFORMATION
Company Background
- Dearn is a company which manufactures and sells shoes in Lucland
- It was founded nearly 100 years ago
- Currently the fourth largest shoe manufacturer and 3rd largest in terms of revenue/market share
- Over the years, it has built a reputation for reasonably priced, well-made shoes for adults and children
- Shoes are sold across Lucland through 75 branded retail outlets and its website
- It does not export any shoes

Ownership
- Although the majority of shares are owned by founder’s family, none of the family members are on the
board or have any involvement in the management of the company
- Dearn is not listed on the Lucland stock exchange but governance arrangements are consistent with good
corporate governance

Manufacturing
- Until 15 years ago, all of Dearn’s manufacturing was based in Lucland (in Layne town)
- 15 years back, it shifted all its mass production to a X Co, a company located in country of Totland to take
advantage of significantly lower production costs (outsourced to cheaper country)
- Shipping from Totland to Dearn’s warehouse in Layne town is carried out by DT Global Transport
- Dearn’s head office, one factory and warehouse are still in Layne
- The Lucland factory is used to manufacture formal shoes only as they are hand crafted
- Dearn is one of the main employers in Layne town
Products
- Dearn manufactures and sells all four types of shoes using both mass production and hand crafted
o This is unique as no other competitor sells all four types of shoes or uses both mass production and
hand crafted
- All shoes are manufactured by X Co in Totland except formal shoes hich is manufactured in own factory in
Lucland as it is hand crafted product
- Dearn produces 20 different styles (designs) of each type of shoe
- These styles are reviewed on an annual basis and updated for any changes in fashion
- Those which are performing poorly are no longer manufactured, When a style is removed, a new style
replaces it

Product / Competitor Analysis

Product Analysis Competitor
Formal shoes - Handcrafted in Lucland factory - Parrish is the market leader (8.9%
- It has “MADE IN LUCLAND” logo (will market share)
attract patriotic customers) - Parrish sells formal shoes only
- Most expensive shoe in Dearn’s products (specialized / niche)
portfolio - Dearn’s prices are lower than Parrish
- Target market 30-50 yr old
Semi formal shoes - Price is cheaper than Dearn’s formal - Dearn is the market leader
shoes - Betterby is 2nd largest and its market
- Mass production in Totland by X Co share is quite close to Dearn
- Target market 55+ yr old - Prices are similar to Dearn
Casual shoes - Price is cheaper than Dearn’s semi - Rigo is the market leader (11.1% market
formal shoes share)
- Mass production in Totland by X Co - Rigo sells casual shoes only (specialized /
- Target market 18-30 yr old niche)
- Dearn is struggling to engage with this - Rigo has strong brand loyalty in this age
age group (e-marketing / social media / group
app required?) - Dearn’s prices are lower than Rigo
Children shoes - Mass production in Totland by X Co - Dearn is the market leader and has
- Target market under 18 yr old excellent reputation
- Dearn’s closest competitor is a small
manufacturer called Tiptoe

Physical Sales
- 88% of Dearn’s revenue is through its 75 retail outlets which are located accross Lucland
- Dearn has excellent reputation for high customer service and this is one of main reasons for the its success
- The company has no retail outlets outside Lucland nor it exports through distributors
Online Sales
- 12% of Dearn’s revenue is through online sales (lower than industry average of ~30%)
- Online selling is limited to Lucland only (no international sale even though there is high reputation and
demand for hand crafted shoes internationally)
- Dearn does not provide home delivery service to its online customers.
o This is against market norms
o Contradicts with Dearn’s value of high customer experience
o Dearn’s online revenue is quite low (12%) as compared to industry average of ~30%

Use of Technology in Manufacturing Process

- Dearn has made significant investments in advanced manufacturing technology in its Lucland factory for
those process not involving by skilled labour
- It has also invested in an automated picking process in its warehouse which automatically selects and
retrieve inventory for its retail outlets.
- However Online orders have manual picking process

Use of IT

System Comments
Finance - Head office has off-the-shelf finance system which has been in place for a
number of years
- Investment will be needed soon in a new finance system
HR - Head office has off-the-shelf HR system which has been in place for a number of
years
- HR system is fit for the purpose of current operations
- There is also an intranet which includes information and resources for staff and
an option for staff comments
Inventory - A new inventory system was recently introduced but it does not provide full
management information
o For inventory at retail outlets it provides real time information on a daily basis
o But for inventory at warehouse / factory, it is updated once a week only
E commerce - E-commerce platform has relatively limited functionality
- Due to this online sales is only 12% (vs industry average of 30%) and impacted
Dearn’s ability to engage effectively with digital marketing (specially in casual
shoes targeting younger generation)
Key stakeholders

Shareholders - Major shareholder is founder family – 70% holding

- None of the family members are on the board or have any involvement in
the management of the company

Staff - High levels of loyalty, commitment and satisfaction

- Staff turnover is low
- Staff also have 10% share holding

Customers - Number of returns from customers has been slowly rising due to faulty
shoes produced by X Co

X Co - X Co is one of Totland’s largest shoe manufacturers (both good and bad)

- Relationship between Dearn and X Co was very positive for 13 years
- Since last two years, there have been a growing number of quality issues
- Number of returns from customers has been slowly rising due to faulty
shoes produced by X Co
- Delays in the despatch of orders from X Co have also been increasing

DT Global Transport - Service levels are excellent

Trade union NSU - Most staff employed in the industry are members of the National Shoe
Union (NSU), which looks after the interest of its members

Industry body LSU - Lucland Shoe Association (LSA) aims to promote the industry by providing
expertise, support, advice, guidance, government relationship, etc.

Suppliers - Other than X Co

- Particularly for hand crafted shoes manufactured in Lucland

Banks - No information provided in preseen

ST/H not mentioned in Preseen

Directors - Most of the directors have worked for Dearn for over 20 years and
relationships between them are positive (both good and bad)
- BOD take a risk averse approach to decision making

Society / community - Dearn is one of the main employers in Layne town (creating jobs)
- High level of CO2 emission

Government - Compliance with several regulations such as employment, health and

safety, consumer protection, competition, data protection legislation,
copyright laws, etc.
Risks

Risk Comments
Supply chain - High dependence on X Co and DT Global Transport
disruption - Delays in the despatch of orders from X Co have also been increasing
- Adverse political and war situations
- Natural calamities such as hurricane, earthquake, tsunami, pandemic etc.
Economic downturn - Lucland economy has slowed down from 5.1% five years ago to 1.1% (20x4).
2025 forecasted growth is 0.8%
- Reducing disposable income
- Demand for mid price shoes is falling and demand for low price shoes is
increasing
Limited online - Online selling is limited to Lucland only
offering - Dearn does not provide home delivery service to its online customers which is
unusual and against market practice (only 12% sale through online)
- E-commerce platform has relatively limited functionality
- Not engaging effectively with digital marketing / younger generation
- Dependency on internet
- Risk of hacking, cyber crime or data breah
Product recalls - A large proportion of the shoes purchased online are returned
- Number of returns from customers due to faulty shoes produced by X Co has
been slowly rising
- Contradicts with Dearn’s mission and value of quality and customer experience
Product quality - Number of returns from customers due to faulty shoes produced by X Co has
issues been slowly rising
- Contradicts with Dearn’s mission and value of quality and customer experience
Environmental - Manufacturing process causes significant emission / CO2 release
impact - Shoe industry contributed 1.4% to global emission
- Hundreds of thousands of shoes are disposed of each year which takes years to
biodegrade (no proper recycling)
- Growing number of customers are unwilling to purchase shoes manufactured
outside Lucland (negative impact on environment due to shipping)

Some additional risks not mentioned in preseen:

Competition - Market share is falling since last two years
- High threat of new entrants in hand crafted shoes due to high demand
- Casual shoes: Rigo has strong brand loyalty targeting 18-30 age customers, a
demographic Dearn is struggling to engage with
Staffing - Increase in demand of skilled labour due to high demand for hand crafted shoes

IT/cyber security - Data hacking and cyber crimes

- Data breach / data protection legislations
- High dependency on internet
 Risk Comments
Regulatory - Compliance with employment, health and safety, consumer protection,
competition, data protection legislation, copyright laws, etc.
Exchange rate - Majority of the manufacturing is done by overseas supplier X Co

Reputational - Number of returns from customers due to faulty shoes produced by X Co has
been slowly rising
- “Possible” bad employment practices by X Co
- Bad reputation due to adverse environmental impacts
- “Made in Lucland” logo not there in any shoes except formal shoes
Business / financial - Industry growth is slowing down (due to recession)
risk - Demand for mid price shoes is falling and low price shoes is increasing
- Dearn’s revenue, market share and GP margin is falling since last 2-3 years

Board Structure and Governance

- 12 directors:
o 4 NEDs
o 8 EDs (including Chair and CEO)
o Chairman is ED instead of NED
- Dearn is unlisted so corporate governance rules
are not mandatory
- The directors made the decision not to have any
board sub-committees such as audit, nomination
and remuneration committees
- There is an internal audit team which reports to
the CFO (ideally should report to NED)
- Most of the directors have worked for Dearn for
over 20 years and relationships between them
are positive (both good and bad)
- BOD take a risk averse approach to decision
making
Roles of the Board

SOME OBSERVATIONS:
- CFO:
o CFO looks after risk management
o Internal audit team reports to the CFO (ideally should report to NED)
- CPO:
o CPO is responsible for marketing i.e. no separate / dedicated marketing director
o No mention of about e-marketing?
o No mention of quality management ?
- CIO: No mention of data security and data analytics?

Organizational Structure
- Dearn has a functional, top-down, hierarchical structure, with clear chains of command and formal lines of
communication, responsibility and authority
- Processes are well defined to ensure effective and efficient operations
- The organization is divided into departments
- Total 10 Departments:
o Headoffice 7 (Finance, purchasing, business development, human resources, IT, research and
development and customer service)
o Factory 2 (production and warehouse)
o Retail outlets
- Department heads reports to directors
Mission and values
- Mission
‘To provide our customers with well-made, reasonably priced shoes and an enjoyable
customer experience’
- Vision
‘To become the first choice for shoes for the whole family’
- Values
o Respect for our history
o A focus on quality of product and service
o Long-term commitment to our staff

Financial and Non-financial KPIs

OBSERVATIONS
- Revenue
o Falling since last 3 years
- Market share
o Falling since last 2 years
- GP Margin
o Falling since last 2 years
o But still higher than industry average (possibly due to outsourcing to cheaper country)
- Customer satisfaction
o Falling since last 4 years
o Lower than industry average
o Contradicts with Dearn’s mission and value of quality and customer experience
- Staff satisfaction
o Higher than industry average
o Slightly reduced from last year (almost maintained since 3 years)
o In line with Dearn’s value of long-term commitment to staff

--End of Preseen Summary---