Guy Norton in Zagreb -

In the former Yugoslavia, Borovo was a true industrial giant, with the footwear and rubber goods manufacturer boasting more than 23,000 employees, many of which were housed in a purpose-built residential area on the outskirts of the Slavonian town of Vukovar in eastern Croatia.

At one point in the 1980s Borovo was the second largest company in Yugoslavia, producing 23m pairs of shoes, 580,000 tyres and 12,500 tonnes of rubber goods a year, which were exported around the globe. Its retail network comprised over 600 stores spread across the length and breadth of Yugoslavia.

With the break-up of Yugoslavia, however, the company's financial fortunes went into what many fear might ultimately be a terminal decline, not least because the company's manufacturing facilities were totally destroyed when Vukovar became the centre of Croatia's bloody fight for independence in the first half of the 1990s. Ultimately, Borovo is estimated to have suffered €300m worth of damage during the 1991-1995 conflict and it was only in 1998 that it was able to resume production in Vukovar, where it is one of the major employers.

Now Borovo, which was established back in 1931, is a shadow of its former self, having just 1,100 employees - roughly half of them based in Vukovar - and is facing stiff competition for customers from imported products made in low-cost labour destinations such as China.

Mismanagement

In recent years, the company has become notorious for racking up losses - it last made a profit in 2004 - and the feckless behaviour of its former management. One-time chief executive Mirko Cavara, for example, attracted widespread opprobrium in 2009 when it was reported that he had purchased a Volkswagen Phaeton with a list price of HRK500,000 (€70,000) despite the 100% state-owned company being strapped for cash after it registered a loss of HRK11m in that year. Cavara claimed that as boss of a major state-owned company it was only right that he should drive a luxury car. Cavara's limousine has now been sold to fund his severance package after he refused to accept a lower paid, more junior post at the firm. Cavara also had workers at the firm build a yacht for his open personal use, although he claimed that he paid for the construction of the 10-metre craft out of his own pocket and wanted to see if the company could diversify into shipbuilding. Finally, the former management burdened the company with a series of expensive short-term loans, which they used to pay day-to-day expenses rather than fund future development.

Small wonder then 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. However, Hrvoje Merki, who was appointed as the firm's new chief executive at the end of March, is determined to disprove the Cassandra-like predictions of Borovo's demise with a root-and-branch restructuring of the company that he hopes will return the firm to profitability 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. Its high-quality products need to be recognised by the market and the market needs to be expanded through new sales channels. The only thing that has to be done is to manage all these resources effectively and wisely."

However, the 38-year-old Merki, who has extensive experience of working for major private sector companies in Croatia, is under no illusions about the size of the task that lies ahead of him, given the years of 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 cites Borovo's own footwear stores as an example of past irrational management decisions. "It's strange that only 22% of the shoes and boots in our own shops are from Borovo, while 64% are from China and 14% from 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."

Market driven

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 gain a proper insight into the true extent of the firm's operational and financial problems so that the new management team can formulate a comprehensive recovery plan to help turn Borovo's financial fortunes around.

Merki expects to receive the results of the audit by mid-August, after which an in-depth restructuring programme will be submitted to Borovo's owner, Audio, the government agency which manages state-owned assets in Croatia. "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.

Moreover, while Borovo's recent financial performance give plenty of grounds for concern - in 2011 the group racked up HRK21.5m of losses, a 363% increase on those for 2010 - Merki also believes there are plentiful reasons for optimism about Borovo's future.

Among the reasons for his upbeat view on the firm's perspective 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 seek compensation for with the active assistance of Croatia's ministry of foreign affairs and the office of Croatian President Ivo Josipovic. Recent press reports indicate that after years of wrangling, the Croatian and Serbian authorities may announce a landmark settlement relating to such issues as Borovo's stores later this year.

Meanwhile, at home Merki is determined to strengthen an already extensive sales network of Borovo stores. Currently, the firm boasts 105 stores throughout Croatia and is looking to add at least a further 25 outlets as part of an effort to expand the sales and marketing side of the firm in support of its manufacturing activities. Despite the company's recent financial woes, Borovo remains a major footwear manufacturer, producing 850,000 pairs of shoes in 2011 alone. In order to capitalise on that strong manufacturing base, Merki has also introduced a motivational training programme for all its existing store managers in Croatia in order to increase its domestic revenues, while it is also looking to boost its overseas sales, with an increased focus on high-growth markets such as Russia and the Middle East. As a result, Merki expects the Borovo group to report "a modest profit" as early as next year.

While he declines to comment on the likely outcome of Borovo's restructuring plan in terms of how many of the current 1,100 employees will remain with the firm, he says many of the older workers will be encouraged to seek early retirement, while younger employees will be hired to fill an increased number of sales and marketing, and production positions. "We do not think that there will be a need for drastic lay-offs," says Merki.

So while it may longer be the industrial giant it once was, a much smaller, perfectly reformed Borovo does at least look to have a viable future.