I am not buying any of these automatic stitching machines again,'' Manoj Kumar thought to himself, returning the brochure of an Italian machinery manufacturer to its big, plastic holder. ''Who needs graphic user interface, barcode reading system, and automatic pallet transfer?'' Kumar's monologue continued. ''If things turn any worse, I will soon be staring at losses.'' Kumar's grey mood was in contrast to the brilliantly colourful Bologna Shoe Fair in Italy. For the 38-year-old Managing Director of Freedom Footwear, attending the Bologna Fair (or Fiere, as the Italians called it) was an annual ritual. It helped him stay abreast the latest developments in footwear technology and fish for ideas that could improve efficiency of his 40,000-pair-a-day plant in Gurgaon, near Delhi. And God knew, as much as Kumar, that Freedom needed to become more efficient.

For the first time since Kumar's grandfather founded Freedom out of a small shed 55 years ago, the family-owned firm was seriously questioning its future. Sure, at total sales of Rs 400 crore, the company was still the second-largest footwear manufacturer in India. But size wasn't a big advantage in this industry. For instance, market leader, Regent, was losing money hand over fist because of competition from the unorganised sector. Freedom was less affected because it had a workforce that was not only smaller, but also cheaper than Regent's. Besides, Freedom was a zero-debt company. Regent was not.

Traditionally, shoemaking had been reserved for small-scale units. In fact, in the case of Freedom too, there were five units that comprised the Freedom ''group''. Only one of the units was listed and its stock price had plumetted from a post-listing high of Rs 300 to about Rs 20 currently. The unorganised players did not pay any excise, sales or corporate income tax and, hence, were underpricing by at least 35-40 per cent. The result: manufacturers like Freedom that paid all the taxes were increasingly getting edged off shop shelves. Kumar's trip to Bologna was part of his quest to find ways to lower wastage at his units.

Over the next three days, Kumar found little of interest at the fair. Ever since margins had come under pressure, he was reluctant to make any more capital investment. His priority was to get as much out of the existing machinery as possible. However, Kumar did manage to start a relationship with a niche footwear design firm in Italy that, like Freedom, was family-owned and managed. The new line of formal men's footwear that Freedom had been planning would be created by the Italian design firm, provided their samples appealed to Kumar and his director-cousins. ''I am glad the trip wasn't a total waste,'' Kumar said to himself as he boarded the plane back to Delhi.

Nothing could have prepared Kumar for the news he received early next morning. He had barely arrived at his modest office in Safdarjung Enclave (Delhi) when his first cousin and director (manufacturing), Baldev Raj, walked into Kumar's room. ''Eagle Shoes is shutting shop,'' he announced, without bothering to say hello or shake hands.

''You are kidding,'' Kumar said. ''How can a company that's No. 5 in the market, has a strong brand, and arguably one of the best manufacturing lines, simply fold up?''

''Because their net worth is getting wiped out,'' answered Raj. ''Because unlike Freedom they built their manufacturing facility with expensive debt and servicing it at a time when profits are shrinking has blown a hole in their bottomline.''

''So what are the Bhasins going to do now?'' asked Kumar, who had known the Eagle promoters for the last 10 years.

''They have other businesses that they can focus on while Eagle goes into a long-drawn BIFR rehabilitation programme,'' Raj said with sarcasm.

''Eagle's exit is good for us because that's one less competitor to worry about,'' Kumar said. ''But the flipside is that it hints what's in store for the others like us. I want a meeting later in the afternoon. Get Suman and Ranjan, too,'' he said, referring to his cousins in charge of business development and finance, respectively.

''What about Rathor?'' Raj asked.

''Yes, of course. Him too,'' Kumar said. Sandeep Rathor was a leading leather technologist and a non-family director on the board of the listed company.

At half-past-three, the five men were gathered in the main conference room.

''Let's take stock of the situation,'' Kumar said, kicking off the meeting. ''Last three years, the growth in footwear for organised players has been below expectation. In 1999-00, we were hoping for a 15-20 per cent growth in topline, but ended up with just 10 per cent. The following year when we tempered our expectations down to 10 per cent, the actual growth was about 7 per cent. This year the market seems to have rebounded a bit, but I am not looking at anything more than a 10 per cent growth.''

''Thanks, of course, to exports,'' pointed out Suman Agarwal. ''Our exports grew 25 per cent last year,'' he said looking at Ranjan Goel.

''But it is apparent that without domestic growth, our export competitiveness won't last,'' Kumar pointed out.

''Already our credit period in the domestic market is going through the roof,'' Goel cribbed. ''Three years ago, we were offering a 20-day credit period. Now it has soared to 90 days and still our dealers pay up only on the 91st day.''

''Once again, the unorganised sector is to blame,'' noted Agarwal. ''Of the Rs 6,000 crore that the footwear industry clocked in sales last year, the share of the organised industry was only Rs 1,500 crore. Profits are better on unbranded footwear.''

''Part of the problem is a lack of long-term government policy,'' Kumar rued. ''If you keep changing the excise rules every year, how am I to make long-term investment plans? Different states have different rates of sales tax. In most of north India the rate is around 8 per cent, whereas in West Bengal it is 18 per cent. Besides, this whole business of MRP is bugging me. Why is that only organised sector players have to print the MRP on their products?''

''There's little we can do about the government's quirks,'' said Goel.

''You make it sound so harmless,'' Kumar said with a mock laugh. ''MRP is creating major problems in distribution. Consider this: a dealer in Connaught Place has higher operating costs and, therefore, expects higher mark ups from us. Fine. But the moment I do that some other dealer in a less expensive locality stops buying from me and goes to the CP dealer.''

''Why does that make sense?'' Rathor asked.

''Here's how,'' Kumar began to explain. ''Assume that my mark up to the CP dealer is 30 per cent and that of the non-CP dealer is 20 per cent. It's easy for them to strike a deal where the CP dealer passes on consignments to the other guy at 25 per cent mark up. Both gain 5 per cent each at Freedom's cost.''

''What are our options?'' Rathor piped up again.

''We have to get into retail ourselves,'' Raj said. ''That way, we can stop this profit pilferage from happening.''

''What about competition from the unorganised sector?'' Goel questioned. ''How do we take care of that?''

''We can't,'' said Kumar as a matter of fact. ''As long as tax laws are skewed, we have to focus on becoming more efficient so that we can cover a wider range of price points.''

''How about manufacturing in China?'' Rathor queried.

''I've explored that option, but it would eventually mean killing our units here,'' Kumar replied. ''And let's not forget that manufacturing is our strength. We are only 15 years old in the domestic market (having spent the previous 35 years exporting unbranded footwear) and, therefore, have much to learn in terms of brand and marketing.''

''The only way we can beat the unfair competition from unorganised players is by controlling retail,'' said Raj. ''That's something garment manufacturers have started doing.''

''Yes, but there are issues,'' said Kumar. ''Pilferage for one. We can standardise our systems, but there's no guarantee against pilferage. Also, there's a shortage of skilled people in retail, and how do we take care of returns, considering that our manufacturing unit is in Gurgaon and the outlets we sell out of could be anywhere? How do we take care of varying taxes without affecting our bottomline?''

''Now that the sector is dereserved, why don't we merge our five units?'' asked Rathor. ''Then, we can have a stronger balance sheet.''

''We explored that possibility,'' Kumar said. ''But law does not allow partnership firms to merge with a corporate entity.''

''So, what's the immediate future for Freedom?'' asked Rathor.

''As long as the 10 per cent growth holds up, we can put off the crisis,'' said Kumar. ''If it doesn't, we may be in trouble.''

''Which means for our long-term survival we need to control retail, besides becoming more efficient,'' stated Agarwal.

''Yes, we do have to become more efficient,'' agreed Kumar, ''but I am not sure about getting into retail. After all it has problems that we may not be able to cope with.''

"An option could be getting a partner for the retail initiative," Goel tossed the thought.

"It certainly is an option," agreed Agarwal, "and one worth exploring. As I see it, getting a partner has two advantages: one, it limits our capital investment in retail and, two, it also takes care of the management part of it. If our partner is experienced in retail we don't have to worry about finding scarce retail talent," Agarwal said, looking to Kumar for his comment.

"A joint venture is a good idea," accepted Kumar, "but I don't think we should get into a situation where we become the minority partner. One of the reasons why we said no to China was the fact that we couldn't own a majority share in the venture. We must have the upper hand, be it manufacturing or retail."

"But can we have the cake and eat it too?" asked Raj. "We are not in a position to launch and operate a nationwide chain of stores. If we do that then we'll no longer be a footwear manufacturer. We'll become footwear retailers."

"But Regent does that," Kumar argued. "Its own people run all the outlets the company has."

"But Regent has been around for ages," pointed out Goel, "and it struck the real estate deals when there was virtually no value associated with real estate."

"I agree," Raj said. "Just look around. There are retail chains mushrooming all over the country. Property prices and rentals are rising. We cannot possibly replicate Regent's distribution model."

Goel added, "Having our own people run, say, 500 or 600 outlets will wreak havoc on our payrolls. One of our advantages is manpower cost. We'll lose that overnight."

"See, I told you there are problems with controlling retail," Kumar went on the defensive. "I think we should put this issue on the back burner and focus on pushing growth and reducing our costs. Let us not think of retail for the moment.''

What should Freedom do? Get into retail and address problems as and when they rise or continue with the dealer system?

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