Payless ShoeSource Inc. is a self-serve fashion-focused low cost shoe retailer. The company was founded in 1956 in Topeka, Kansas and has expanded significantly within the domestic and international markets to almost 4,500 stores. On their website, the stated mission is “to democratize fashion and design in footwear and accessories. Payless seeks to compete effectively by bringing to market differentiated, trend-right merchandise before mass-market discounters and at the same time as department and specialty retailers but at a more compelling price.”  Payless is a subsidiary of Collective Brands, which a holding company for three business units: Payless ShoeSource, Collective Brands Performance + Lifestyle Group, and Collective Licensing International. These units function separately, but have significant business relationships especially in brand licensing for Payless.
In 2009, Payless reported $2.576 billion in sales and capture a large percentage for the cost-leader footwear market.  Payless is represented in all 50 states. Internationally, Payless has multiple locations in Central and South America, Canada, and the Caribbean. In 2009, Payless opened stores in the Middle East and has signed agreements to franchise into Russia, the Philippines, Israel, Malaysia, Singapore, Mexico and Indonesia. 
When Payless was founded, it was based on being a low cost provider of shoes for families in a self-service format. During the 50 years since, Payless has evolved from a low cost distributor to a low cost producer to an on-trend fashion, cost conscience producer and provider while retaining the self service format. This evolution was a result of changing customer demands and increased retail competition. Payless retooled their strategy when other low-cost shoe providers such as Wal-Mart and Target entered the shoe market. This increase in competition on the cost-leader strategy forced Payless to examine their core competencies and their position in the marketplace. As a result, the emphasis on fashion and design became a priority which is reflected in both their shoe and retail store design. 
Over the past fifteen years, Payless has been increasing the fashion level of their products and have now repositioned themselves as an on-trend fashion outlet with trendy names at reasonable prices. Payless has formed several partnerships with designers to create capsule collections exclusively at Payless that comprise one season; however due to the success of these designer collections Payless has been expanding these designer relationships.  The partnerships with designers started in 2007 with Abaeté, as a seasonal collection. The success of the Abaeté collection leads Payless to develop other partnerships with designers like Lela Rose, Alice + Olivia as well as Zack & Zoe. The most recent guest designer, Christain Siriano, has been a success due to both his design and his popularity of winning season four of Project Runway. With the immense success of the show, there was instant name recognition and the target audience of the show is in line with the target market of Payless. In fact, Christian Siriano’s capsule collection contract was recently extended to be a multi-year contract to its immense success in the market. 
When looking at the external analysis for Payless ShoeSource, the general environment is composed of elements that influence the shoe industry and the companies within it. These elements group into six different environmental segments: demographic, economic, political/legal, sociocultural, technological, and global.
Demographics for Payless have always played an important role in their overall strategy. Targeting women 16-49 with an income lower than $75,000 USD is their key to success.  This target market is ideal because individuals within this demographic express themselves through fashion. The economic factors for their general environment are a major downfall. With a target segment on a middle-class income, economic hardships are going to be devastating for Payless. Consumers will spend less on non-necessity goods in hard times, shoes being one of those items. The economy will also influence Payless because they compete based on lower priced fashion items to gain market share. However, since Payless is an international business, economies in other countries such as Latin America or the Middle East can offset these issues in the domestic market.
International expansion is where political and legal elements can comes into play for Payless. Currently Payless has 643 international stores with plans to expand heavily in the years to come. By executing joint ventures and franchising, Payless is able to mitigate some of the political and legal risk it could encounter in foreign markets. The sociocultural environment for Payless externally is again positive. Since they are well known in the United States and Canada for keeping up with the latest trends, they can leverage this strategy worldwide. Each country is researched constantly for new trends or looks in the footwear and accessory industry. This research combined with knowledgeable local partners helps Payless with product selection to meet local demand. By researching and overcoming the sociocultural factor, Payless has gained market share each year, even in rough economic times in the United States.
When looking at the technological external environment for Payless, the company is far beyond its competition. Although Payless is based in Topeka, Kansas, all of their shoe manufacturing is completed in the Unites States and 13 other countries around the world. Their main warehouse is 807,000 square feet designed with a state of the art coordination system. These systems keep all the stores replenished with new supply at least twice a week based on style, color and size of the shoes.
The global environmental factor for Payless is also a significant part of their strategy.
Global factors influencing business are legal, political, social, technological and economic. Each country Payless enters, these influences will change. Moving into global markets via joint ventures or franchising helps lessen the risk for Payless because the partner understands the market and environment the store is operating in.
When looking at the supplier power for Payless, 85% of their footwear comes from Chinese factories, 10% from Vietnam and the other 5% from Brazil, India, Indonesia and Thailand.  Since Payless depends on third parties to manufacture and supply their products, this could cause several problems. There could be a shortage of raw materials, inadequate manufacturing and shipping capacity of the product. In addition, the third parties price fluctuations of raw material, skilled labor as well as currency exchange risk could impact the low price strategy of Payless. Payless also has risk in transportation since it relies on third parties to transport and deliver its products. These third party relationships impact the ability to deliver footwear on time and at a low cost.
The buyer power for Payless is a significant threat. Given their current fashion strategy, Payless could one day overcome buyer power, but as of now, they still compete on price and focus this incentive to benefit the consumer. With this buyer power, the threat of substitution is very high for Payless. The footwear industry is all about the latest styles, colors and looks. If Payless did not have a research team focused on implementing new products, substitution would be high for Payless. Bringing in Christian Siriano, Lela Rose and Isabel Toledo as new designers has given Payless a more upscale look at a cost effective price for the consumer. Though there are substitutions for their brands in each product category, Payless is less expensive overall.
Competitive rivalry in the footwear industry is never ending. Payless has to compete with the big box stores such as DSW, Famous Footwear, J.C. Penney, Kohl’s, Macy’s, Marshall’s, Ross Stores, Target, TJ Maxx, and Wal-Mart. All of these competitors have the capability to hurt Payless in a cost leadership strategy. However, Payless competes in fashion at a lower price point. This fashion focus aligns with their target market that will buy these designer shoes with Christian Siriano, Lela Rose and Isabel Toledo. 
The threat of new entry for Payless is currently small. Although Payless has many competitors in their industry, it would be almost impossible to compete with their net sales and store locations around the world. The startup costs would be high and the sourcing for factories would be time consuming. Designers would need to be experienced and willing to work with foreign factories. New competition could compete on price, but not on quality fashion footwear. Payless has a very favorable position and it should be easy to defend against new entrants.
“Payless ShoeSource is dedicated to democratizing fashion and design in footwear and accessories to the world and inspiring fun fashion possibilities for the family. We provide our customers with the style they want at a great price, and our nearly 4,500 store locations offer an engaging, easy-to-shop experience and outstanding customer service.”  The current mission of Payless ShoeSource has not been long-lived in this form. After the company experienced it is first lost in 2003, the company worked hard to turn things around. Beyond working to increase sales and correct the inventory problems, the company revised its mission statement, vision, and company strategy in 2005.  The current mission has driven the company to develop strategies, which have led the company to exhibit internal strengths and prevailing weaknesses.
The most obvious overlying strategy for Payless is cost leadership. This can be determined not only by the mission statement,  but also by the name of the store. As the mission statement states, Payless wants to provide their customers with the style they want at a great price”. Also, the title “Payless” gives the impression that customers will pay less when buying their shoes at Payless Shoe Source. This name not only exhibits the goals of the company but what customers can expect by shopping at any of Payless ShoeSource’s 4470 locations.
With the major changes made in 2005, Payless developed new strategies to expand their customer base, which would in turn lead to more sales. These strategies developed in 2005 will be focused on in this analysis as 2005 was a monumental year for strategy development and will be compared to the 2009 annual report analysis of the success of such strategies. One of these new strategies was that Payless would go forward with an offer of “on-trend, differentiated products.”  With this, it would increase its accessories and offer a larger athletic footwear section.  In the 2009 Annual Report, Payless stated that they advanced their strategy “to grow beyond footwear as broader and deeper product offerings drove dramatic improvement in the accessories business” at Payless ShoeSource. 
Another strategy developed in 2005 was to strengthen and reposition Payless by introducing a “house of brands” available to the consumer at a discounted price,13 which would fall directly in line with their overlying cost leadership strategy. This house of brands allowed customers to have access to a variety of brands within Payless, which, according to Matt Rubel, CEO of Payless, would fulfill their focus of “democratizing design and fashion in footwear and accessories” and their goal “to inspire fun fashion possibilities for the family.” Acquiring brands like American Eagle â„¢, according to Mr. Rubel, “is an important step in achieving this and to our ability to connect with young consumers.” The “house of brands” includes American Eagleâ„¢, Champion®, Airwalk®, Spalding, and Shaquille O’Neal endorsed Dunkmanâ„¢ . 
The third strategy developed in 2005 was to enhance the customer experience by hiring friendly, helpful employees to improve customer service.  The 2009 annual report confirmed that one aspect of this customer service included measuring children’s feet, which helped increase the sales of the children’s shoes segment.  Beyond this, there is no data shown as to how successful this strategy has been.
The last change in strategy added in 2005 was to improve the efficiency of the business by introducing better technology including a POS system in order to shorten checkout time and keep better track of sales. In addition, a logistics network would be introduced to improve the company’s inventory system and also to improve flexibility in the inventory.13 As far as efficiency goes, the 2009 annual report stated that an added U.S. distribution center shorted replenishment times and lowered costs, improving the gross margin by changing how sizes were assorted and defined store clusters, improving productivity and profitability in 2009. 
Beyond the 2005 strategy developments, a more recent development for Payless is its newly defined international expansion strategies as outlined in the 2009 annual report. Looking at Payless specifically, Collective Brands began franchising Payless internationally 18 months ago and predicts that it will have about 700 locations abroad within the next five years, including 300 of those in Indonesia.  In the 2009 annual report, it was stated that Payless opened a significant amount of stores in Columbia within the year.  In 2010, the store introduced a new franchising business model to expand internationally in a quick, low-risk, capital-efficient manner.  Although the strategy was introduced in 2010, the first three franchised stores opened in the Middle East in 2009. 
Ownership strategy differs by geographic regions. In North America, mainly the USA and Canada, Payless stores are company-owned. In Central and South America, stores have been opened as joint ventures with a multitude of partners. As stated above, franchised stores have existed thus far in the Middle East with franchising as a strategy for future expansion, mainly focused on the Middle East and Asia. 
The last strategy to be assessed in this analysis is a method Payless developed just this year. This strategy is to develop a recognition of the company as social responsible in order to lure in the socially conscious consumers. Payless has teamed up with Airwalk for “The Good Shoe Project” to allow shoppers to Buy-One-Give-One to a child in need where customers can buy a pair of Airwalk shoes for $19.99 and Payless will give a pair of kids’ shoes to a child in need through their new partner, World Vision. Payless plans to give a minimum of 100,000 pairs of shoes to children in South America this Christmas season. 
The core competencies and strengths of Payless ShoeSource exist in its store presence, financial stability, and its ability to keep prices low. Store presence encompasses the fact that it has already established itself in all 50 states plus a growing number of international locations.  This presence includes 4470 stores total in 19 countries as of 2009, with 18.6% of stores abroad, or 873 total in 2009. According to many sources, Payless can be considered one of the largest footwear retailers in the Western Hemisphere selling 140 million pairs of footwear and over 40 million accessories in the US, Canada, Caribbean, Central America, and South America in 2009. 
Financially, Payless has grown its gross margin regardless of the 3.9% decrease in sales due to the recession. This includes a 5.2% increase in gross margin in 2009, increasing the gross margin to 34.5%. However, this is primarily due to a low gross margin in 2008 attributable to pre-tax charges of $88.2 million related to the impairment of trade names, $45.1 million due to pre-tax litigation expenses, and $13.2 million of pre-tax charges related to the tangible asset impairment and other charges. However, the higher gross margin can also be attributed to lower product costs and higher initial mark-on prices of footwear in 2009.  Though all of these additional charges decreased the gross margin in 2008, a better representation of gross margin improvement is to compare to the 2007 32.6% gross margin. From 2007 to 2009, the gross margin was improved by 1.9%, or 0.95% per year.
Lastly, Payless has been rather successful in their skill to encompass a wide variety of skills including supply chain management and sourcing to keep prices low while also focusing on fashion. This has allowed Payless to capture the market of moms and middle-class people who care about both fashion and their budget, which is considered to be a success factor of 2009 in the annual report. 
The supply chain management procedures of Payless assist in keeping prices down by making the company more efficient. This includes the strong supply chain management (SCM) system satisfying the 2005 strategy to improve inventory levels.  In 2009 annual report, Payless manages inventory through the use of a variety of systems and models related to planning, forecasting, pricing, and allocations to help align promotions, product flow, and pricing with customer shopping patterns. Although the annual report does not give technical details on these systems, it is clear that the organization of Payless’ SCM systems have proven to increase the efficiency of the company, and improve the gross margin as previously stated.
One way it has done this on a large scale is by reducing markdowns through using intelligent SCM tools which have been able to stock stores by use of customer “clusters”, or customer profiles based on lifestyle, demographics, shopping behavior, and appetite for fashion. Also, the systems keep track of seasonality and climate considerations by geography which have improved the timing of inventory distribution. The SCM systems have the ability to track historical data to use as a precedent of stores’ sales volumes and categories that stores tend to sell well along with specific proportions for inventory forecasting. The high amount of data stored in this system also involves a size assortment matrix tool. This data has reduced old product markdowns by analyzing sizes that could have been avoided in initial purchasing. 
On a smaller scale, the supply chain management systems have provided store-level data management which allows for pricing and inventories to be adjusted on a per-store basis based. Product pricing is performed per store in order to price products appropriately on a smaller scale rather than one corporate or regional price. Size variations are also taken into account on a per store basis in order to produce sales forecasts for ordering inventory, optimizing gross margin dollars and reducing markdowns by giving each store individualized attention. 
Another resource advantage of Payless is its sourcing capabilities. Payless sources out 72% of production to large factories which serve as their manufacturers, consisting mainly of 26 core factories which account for 75% of Collective’s footwear purchases. These factories are given specification and performance standards and then bid for jobs on a competitive basis.  This network of factories allows Payless to manufacture their products at low prices with companies that they know and trust. This is a core asset in its ability to keep prices low in its overall strategy of cost leadership.
Other than supply chain management and sourcing, other factors providing key assets and skills to Payless are listed in the 2009 annual report. These factors are the company’s ability to develop fashionable, high-quality merchandise in an assortment of sizes, colors, and styles appealing to their target customers; the ability to anticipate and respond to changing customer demands in a timely manner; creating an acceptable value proposition for customers; providing an inviting, customer friendly shopping environment; and, providing effective marketing support. 
Resource disadvantages, or assets and skills that are lacking at Payless, mainly include its lack of knowledge in a few key markets, its marketing resources, its financial resources, and its lack of independence. These factors keep Payless from optimizing its ability to compete in the market of footwear and accessories.
Payless lacks significant knowledge in operating in South American markets. According to the 2009 annual report, the firm closed 26 Payless stores in Peru and Chile and were categorized as discontinued operations in the report. The closing of these stores eliminated 200 management and administrative positions, concerning the company with its failure in these markets and the reduced employee morale based on the elimination of these positions. 
Next, the report states its lack of marketing and financial resources as compared to competitors such as Wal-Mart, Target, and other department stores. Payless is concerned in their ability to continue to compete against these low-cost retailers which provide more of a one-stop-shop for consumers and who also have much larger marketing budgets. Beyond this, Payless lacks financial ability to withstand reduced shoe sales whereas these competitors have the ability to withstand fluctuations in the market. High fixed costs in proportion of operating expenses cause declines in operating performance to be magnified with sales shortfalls. Major fixed costs include leasing costs of stores, debt service expenses, and labor expenses which will all remain regardless of sales. Labor expenses in particular remain the same as the stores generally employ minimum employees regardless of sales volume. 
The last resource disadvantage to be concerned with in this analysis is the lack of independence from third parties to manufacture and distribute products. Though this is somewhat an external concern, it is also a problem internally as the company is weak in its ability to withstand factors affecting the manufacturing line.
Overall, the internal analysis of Payless is strong in many areas, mainly its ability to follow execute its mission statement and strategies following directly in line with this mission. A competitor’s analysis will get more into the analysis of Payless ShoeSource’s ability to compete in the footwear and accessories market on both a short and long-term basis.
Comparison to Competitors
The retail footwear and accessories industry is highly competitive. It is comprised of department stores, footwear specialty stores, discount mass-merchandisers, sporting good stores and on-line competitors. In addition, many retailers that have not carried footwear have added footwear and accessories lines to their stores.
For Payless Domestic, they compete mainly with DSW, Famous Footwear, J.C. Penney, Kohl’s, Macy’s, Marshall’s, Ross Stores, Target, TJ Maxx, and Wal-Mart and they seek to compete effectively by coming into the market with differentiated, trend-right merchandise before mass-market discounters. Besides the timing of producing new merchandise, Payless also requires their trend-right merchandise to be priced below department stores and specialty retailers.
In the worldwide footwear industry, Payless faces various competitive challenges from retailers and wholesalers since their financial and marketing resources are less than some competitors. Although under high pressure of increasing competitiveness, Payless still focuses on the following points as bases of enhancing their low cost on trend-fashion competitive advantage:
Developing fashionable, high-quality merchandise in an assortment of sizes, colors and styles that appeal to their target consumers: For example, Dyelightsâ„¢ is exclusively offered by Payless ShoeSource stores. It is a unique feature that sets Payless apart from the competition. The shoes are dyed to the customer’s specifications and are available for pick up in about 10 days at the Payless ShoeSource store or delivered to the customer for an additional shipping fee.  As previously mentioned, Payless also has strategic partnerships with designers that emphasis high fashion for under $60. With their extensive licensing Payless is also able to have a “house of brands” that appeals to fashion focused consumers.
Ensuring product availability and optimizing supply chain effectiveness: Payless uses different systems and models to ensure timely delivered to meet customer demand, which drives sales and margin growth. The company creates targeted assortments based on localized demand and specific product lifecycles. Payless also prices their products at the store level to manage aged inventory. Payless has a global supply chain structure that integrates their design, product development and sourcing functions. Coordinated transportation is also a vital component of efficiency for Payless. They employ the just-in-time model and each distribution center only has eight days of supply for store replenishment. 
High quality assurance and low price: Payless contracts with factories that meet their specified quality and safety standards for shoe production; minimum capacity requirements; production control processes; and agree not to use forced or child labor.  Payless also provides technical design support for their direct purchasing functions. For example, Payless locates their field inspection personnel close to the factories and freight consolidation facilities that they use throughout the world. By concentrating on quality, Payless is able to reduce rework costs.
Shopping environment and customer service: Payless uses a customer focused sales staff to provide attentive, product knowledgeable service. Payless also offers customers a self-selection shopping environment, which allows customers to select their shoes freely. Shoes and accessories are displayed neatly and grouped by type of shoe ensuring self-selection is easy.  Customers can seek help from trained and professional associates if they need any help. In addition, Payless executes an easy and convenient return policy even if the shoes are worn.
This emphasis on cost containment through efficient supply chain management helps Payless maintain its historic low-cost position. This, when combined with its retail product selection optimization, increases profit margins. Payless is focused on the customer experience through excellent customer service and accessible on-trend fashion. Their competitors compete on cost or brand, but are unable to combine the strategies efficiently. Payless has developed a competitive advantage by leveraging their “house of brands”, designer partnerships, efficient supply chain, and optimized product mix.
Although Payless has made some bold and aggressive steps in recent history in order to further strengthen their position in the marketplace, we feel Payless needs to initiate changes on four unique planes. Continued and expanded efforts in pricing strategies and product differentiation, a refined domestic retail system, new strategic marketing initiatives, and a revised overseas expansion policy are all necessary for Payless t
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