Factors see brand identity and overseas investment as the critical topics du jour for the apparel industry this year.
In a recent roundtable discussion held in Los Angeles with factoring executives based on the West Coast, factors discussed the role of brands, the impact of private equity and foreign investment dollars, a manufacturing model that is both domestic and global and the continued influence of the teen sector on apparel trends.
Participants included Mitch Cohen, executive vice president, Western regional manager of commercial services for CIT; Harry Friedman, senior vice president, Rosenthal & Rosenthal; Kevin Sullivan, executive vice president and Western region manager, Wells Fargo Century; Dave Reza, senior vice president, Western region, Milberg Factors, and Ron Vanek, executive vice president, regional manager, GMAC Commercial Finance.
WWD: What is the overall outlook for the apparel industry in 2007?
Mitch Cohen: We're off to a pretty sound year. The suppliers are going to continue to get squeezed for margin compression by the retailers. The suppliers are generally getting smarter to survive, and they're delivering a more efficient model to the retailer.
Harry Friedman: We'll see somewhat of a similar situation to what we saw in 2006, with a slight increase in retail sales on the apparel side. I don't think it will beat expectations — this past year was a little below expectations. We see it as an acceptable year.
Kevin Sullivan: We see a continued emphasis on quality brands, and the clients of ours that have what are perceived to be strong brands in the marketplace will do very well in 2007. Conversely, companies that really don't have a brand, that have to compete on a commoditized basis, are still having a difficult time in the marketplace. Overall, our clients think it's going to be very positive in 2007.
David Reza: We have a fair amount of brands in our portfolio, and they're doing pretty well. They've been under pressure, but not as much as those who sell on price alone. We'll continue to see some price erosion for those people.Ron Vanek: I see it as a continuation of this year, also. The retailers, especially, did very well in the stock market in 2006….The market is bullish, and we're seeing the growth in our portfolio.
WWD: What will change this year?
R.V.: There is a ton of private equity money out there these days. I think you could see the M&A marketplace really pick up in 2007. It's happened in a lot of other industries over the 2000s.I think you could see it in these industries in 2007.
M.C.: Talking to some of the suppliers in Asia who are working directly with the importers on the West Coast, they are supporting the importers both financially and operationally to figure out models where they can land finished product directly to the retailer. That's a potential risk to the industry because in the future they might end up competing with some of our own clients directly.
K.S.: The challenge there is going to be which of those companies can really develop the design and marketing capabilities that the companies in the U.S. have.
M.C.: I think you're going to see it more in the big box retailers, who require replenishment-type programs, where the suppliers need to keep their factories working at high capacity levels.
K.S.: The other thing we see along those lines is suppliers on the Pacific Rim willing to take equity positions, in some cases significant equity positions, in companies in this country.
WWD: How do you see the trend of direct foreign investment shaping up this year?
K.S.: I think you'll see more of it.
M.C.: That's going to be a big change in 2007. There's a lot of dollars over in Asia looking to get invested in the U.S.
H.F.: There is a growing opportunity in this regard. Overseas suppliers will be setting up U.S. warehousing operations to control the goods coming into this country and establishing factoring relationships to manage, collect, and forward the proceeds of U.S. receivables back overseas.M.C.: I think the factoring industry has a great opportunity working with Asia. You can bring more value to them because of your relationships within the United States and understanding how to do business in the United States. If nothing else, you can act as somewhat of an escrow account and operate and move money around the world to protect and help them manage their risks.
D.R.: Especially since, in a lot of cases, they're selling to lesser-known retailers, regional chains, specialty chains or even manufacturers getting open credit, where before they might have been establishing a letter of credit to secure the purchase overseas. Now those exporters in Asia are taking on the risk our clients took on years ago here, so they need us more than ever from that standpoint.
WWD: What impact will the teen segment have on apparel this year?
K.S.: What's taking place relates to a great extent to technology. Kids at an earlier age are much more tech-savvy and have access to more information and can communicate more readily with their peers about what they like and don't like. I think what that ends up leading to is very rapid shifts in taste. Something that maybe had a two-season run in the past might be viable for less than one season. It's going to become a lot more difficult to predict the taste of the teen marketplace, given how much communication they have and how much access they have.
M.C.: The teen market is more reliant on domestic manufacturing today. Because of the quick turn, the trendy nature of the product, we're seeing a lot of local manufacturing back in business to help complement the imports.
K.S.: It really is still a price-versus-delivery issue. To the extent that delivery times and the ability to change rapidly exceeds the importance of price, you'll see domestic production.
M.C.: Denim's a good example. While the fabric is being imported from all over the world, most of the washing and denim finishing is being done right here in Southern California.H.F.: Production, especially in this part of the market, always remains a work-in-progress. Moving production from country to country and place to place to get the best bang for the buck is common.
D.R.: If you're going to be successful in the apparel industry, you have to have the ability to source locally or globally. Some of those challenges aren't as great as they used to be, but knowing when to shift to take advantage of a trend is part of the planning.
WWD: What forces can we see impacting the specialty sector?
H.F.: The consolidation in the industry, the ability to compete on price. If you dissected it further down and looked at what Wal-Mart's impact has been, I think specialty stores have gotten the brunt more than the smaller department store chains and companies like that.
K.S.: Where they've been successful is the higher end of the marketplace, because there you're dealing with a company with a customer that really places a premium on service. And a specialty retailer may be able to react a little more quickly to trends in the marketplace. I don't know if I'd call it a revitalization in the specialty marketplace, but we're certainly seeing an increase in the number of specialty stores that our clients are selling to. It's mostly on the higher end where we're seeing it, because that customer really warrants and necessitates a higher level of service.
R.V.: It tends to be a much more fun place to shop in, not only the product, it's the whole environment of going in. It's dealing with other young people. It's a lot more fun to buy there than to go to Macy's or wherever.
D.R.: In the last five years, with the emergence of a premium denim market that's really centered here in Southern California, a lot of us have seen our clients who are in that market selling into specialty stores because of price points. We're seeing more specialty store activity than we saw 10 years ago, when you saw so much retail consolidation seem to impact the smaller stores and regional chains.WWD: What other sectors besides teen will be noteworthy this year?
M.C.: Accessories continue to be a big business. I see more and more utilizing accessories, for example handbags to bring in customers.
K.S.: I would also point to the organic and sustainable marketplace. We're starting to see companies begin to realize the importance of just focusing on a specific niche of the marketplace, as opposed to trying to be all things to all people. As opposed to what we saw years ago, some of them are becoming quite successful doing it. I think you'll begin to see some of the major manufacturers begin showing lines that have those components to it as that becomes more acceptable to the consumer.
WWD: What other trends do you see?
M.C.: Labels are where it's at. If you read the licensing agreements, you'll see minimums are high and royalty rates are high. If you want to get a strong label and if you want to attach yourself to that brand you're paying a lot of money and giving up flexibility.
D.R.: Probably 75 percent to 80 percent more than you would've paid 10 years ago.
K.S.: The strategic buyers within the marketplace this year will continue to very actively pursue brands and the financial buyers — people that, in some cases, have no industry background in the apparel industry — are also very impressive. I think we'll see that continue. There's a lot of liquidity on the street. In some cases, the investors behind these funds are perfectly willing to get involved in the management of a company, which is something we've only seen in the last few years. That's going to continue to be a very key trend within the marketplace.
WWD: What consumer trends do you see in 2007?
M.C.: I think a trend that you might see in '07 is brands that are dormant being used more and more because people are searching out for labels being revitalized. I've seen a couple of brands already this quarter.H.F.: We're seeing an offshoot of that where a label, for whatever reason, didn't do well or had a big downturn, was popular for awhile, then slid down that slippery slope. Now they are selling that brand or marketing it in a different way to rejuvenate it.
R.V.: You're not starting from scratch. You have some base to work off of.
K.S.: We're definitely seeing some brands that we would consider to be very mature actively trying to rejuvenate the brand.
D.R.: There's usually different people involved.
K.S.: Different people and there's usually initially a different impression of what that brand is really worth on the part of the people who own it, relative to what the marketplace might perceive it as. Valuations being what they are, there's no telling what buyers might be willing to pay, given the current emphasis on brands.
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