"Instead of international growth, we will continue focussing on sales in [our] Baltic markets, simplifying business processes, and reducing operating costs," AS Baltika CEO Meelis Milder said in a press release on Monday. "Cost savings [will] come from dissolving production in the Estonian production units, reducing the number of brands, and ending several loss-making activities, which also means ending cooperation with our Russian franchise partner."

"Baltika's current business model is expensive and the share of fixed costs high, which makes it difficult to respond to external factors and demand," Mr Milder explained. "At the end of last year, we started planning for strategic change. The strong and courageous operating and financing plan for the coming years will hopefully give our employees, customers, partners and shareholders the necessary signal that Baltika is changing. I think it's the best plan for turning a profit."

According to the CEO, in order to meet the net asset requirement set out in the Commercial Code and implement its 2019-2020 operational plan, the company needs the support of its shareholders and has to increase its capital by €5 million, €3 million of which is needed to cover the group's 2018 and 2019 losses and €2 million of which will go toward restructuring the company.

"We will raise this capital via public offering, and all shareholders can participate," he said.

Mr Milder explained that in changing its brand portfolio, Baltika will operate in two customer segments going forward — mainstream and premium. "At current sales volumes, it is not reasonable to maintain a portfolio of five brands," he said.

The mainstream segment will see the current Mosaic and Bastion brands merged with its Monton brand, which is also the group's most successful. Ivo Nikkolo and Baltman, meanwhile, will remain as the group's premium brands.

Adjustments in the group's store portfolio will also be made based on changes made to the brand portfolio. "We will evaluate the number of stores, focussing on the best locations in the best shopping centres and the needs of our new value proposition for the broader target group," Mr Milder said. "Our strength, investments and energy will be focussed on increasing sales, competitiveness and profitability on the Baltic retail market."

Nearly 350 in Estonia to lose jobs

This year, Baltika will also be dissolving its two Estonian production units, located in Tallinn's Lasnamäe District and Ahtme in Ida-Viru County, which employ approximately 340 and account for the production of 33% of the retail group's collections. "Depending on the production process, work will continue in part through late autumn, and in part through the end of the year," Mr Milder said.

"The decision to end production didn't come lightly, as production in Estonia and our fine employees are very important to our company," he explained. "The advance notice will give people the opportunity for a smooth relocation to a new job. We will work closely with the Estonian Unemployment Insurance Fund (Töötukassa) in order to provide everyone the best advice and counselling for changing jobs. A labour shortage has existed for years in Estonia, so I sincerely hope that our people will find new opportunities with other companies."

According to the CEO, the analysis of fixed costs and processes simply won't allow the company to continue operating its Estonian production units. "In order to assure the viability of the company, we need to follow what our competitors are doing and produce in locations in which the price-to-quality ratio is most suitable," he added, noting that it would nonetheless not make any compromises in quality.

The dissolution of its Estonian production units will change Baltika's sourcing process, preparations for which are already underway, according to Mr Milder. "Sewing services will be hired in primarily from partners in the European region," he said. "Product development, design and quality control will still be carried out by Baltika."

With the transition to an optimised brand portfolio, the significant simplification of its business processes and the closure of its two Estonian production units, Baltika Group plans to reduce operating costs by €2 million over the next 12 months.

"I believe that we have a robust enough strategy that has critically assessed the situation as well as readiness to implement these changes," Mr Milder said. "I foresee 2019 as the year of implementing necessary changes; by 2020 we will have hopefully achieved a balance between expenses and income under the new business strategy, and beginning in 2021 we will be prepared for profitable growth."