Baltika announced yesterday that it will end production in Estonia, lay off 340 people and completely revamp its business model. The company had earlier revealed plans to issue €5 million worth of new shares and borrow €3 million from its parent company.
Baltika has already launched efforts to turn itself around and has drawn up a completely new strategy. Long-time CEO and former owner Meelis Milder said the change is Baltika’s last chance.
Does the plan to turn Baltika around already exist or are you still working on it?
Meelis Milder: It exists. Perhaps a more detailed version is still in the works for which purpose we will have a new board member in Mae Hansen.
How will your tasks and those of Mae Hansen differ?
Milder: We need to meet first. We have functional work allocation between board members, but Mae Hansen will come to realize this specific plan. We will meet with her in the capacity of a board member later this week. We will agree on the specific model for cooperation then.
Do I have it right that Mae Hansen could be next in line to run Baltika?
Milder: Not to my knowledge at the moment (Laughs). I believe her sights might be set on bigger fish than a Baltic fashion outlet.
What are the core items in your plan to turn Baltika around?
Milder: The biggest change for us is the decision to stop aiming for international growth at all costs. A business model analysis from the first half of last year suggests that the further away from the Baltic market we go, the less money we make. Not to mention the fact last year saw the materialization or risks associated with our current franchise partners.
My interpretation of a listed company and general expectations of shareholders was that the company needs to keep growing, and that profit might not always be the most important indicator – rather, there was a vision of international growth. We have thought better of it and are taking a step back now.
We will keep sales and a market we feel comfortable in – the Baltic retail market. We will accept or involve all other sales channels and potential partners only if strictly retail product development is flexible enough and suitable for them. Allow me to give an example. If traditional wholesale business sees us prepare a collection for nine months which we will then display for an entire season, that is the kind of cooperation we will not be able to afford from next year.
Catering to our own retailers directly is far quicker and more flexible.
The other major change is that I will finally heed criticism that has been most common in the past 15 years: why does a company like Baltika need so many brands. We will go from having five brands today to just two or three inside the next year.
First, we will merge our mid-range brands Monton, Mosaic and Bastion. As recently as last fall, our plan was to introduce a new brand called Verenni. But since we cannot afford to market a new brand and the risk of losing sales is too great in the first year, we decided to retain our best-known brand that is Monton.
You will cease production in Estonia in a situation where you do not have your own production anywhere else. Will that mean concession in terms of quality?
Milder: Not necessarily. None of our competitors are making clothes in Estonia or have their own factories. It does not translate into poorer quality in any way.
When H&M came to Estonia, you said they were not a competitor for you. Have you changed your mind?
Milder: You also say things when someone pushes themselves into your sandbox. You will not say it means you’re in trouble. My utterance was more truth than bravado at the time. I could not say with any certainty that economy brands would reshape the market. They are not a direct competitor today either, they have simply changed the market. They have given people a different idea of what fashion is, how quickly it needs to change and what it costs.
I don’t know whether H&M is a competitor, but they certainly have had an effect on us. Their strategy is a bit of a mystery. Unlike Zara, that clearly tends to consolidate and avoid expansion at all costs, H&M are still expanding. That said, it seems like a clash of titans now, leaving us in the role of bystanders.
I don’t know to what extent you can talk about your upcoming issue of shares, but will it be public and who do you have in mind besides major shareholders?
Maigi Pärnik-Pernik (CFO of Baltika): The issue of shares will be public, just like all its predecessors. How many people will participate is another matter.
Your biggest shareholder (KJK Fund Sicav-SIF) has expressed preparedness to subscribe. Have they said they will cover the entire issue?
Pärnik-Pernik: We do not know the scope of their ambition.
According to my calculations, you have raised €14 million in the past decade. This means you are largely living on the mercy of your biggest shareholders. How long will their patience last?
Milder: I suppose you should ask them that.
You have received some feedback?
Milder: I can only speak for myself here. I see it as our last chance to turn the company around. Let us leave crises aside, whereas the €14 million you mentioned was the price of the crisis. That is how much we lost, and we needed to recover capital for which this was the only way.
From there, we have, unfortunately, stayed in the black during good times and lost money when times have been tougher, which in most cases has not been associated with Estonia (what I mean is the situation in Russia and Ukraine); we have lost money.
Since the crisis, money that has been put into the company has allowed us to maintain this business model without help from banks. We started working on our new business model last spring, and by today, the supervisory board and shareholders agree that the turn is worth investing in.
Äripäev speculates (yesterday – ed.) that KJK will have over 50 percent of shares after your issue, buy them and leave the market. What do you think or know about that plan?
Milder: I cannot comment on that.