SAN FRANCISCO — Apparel manufacturers are looking for control.

Prices are falling on the retail and wholesale sides, unemployment is rising, consumer confidence is waning again, and multiple, ongoing trade negotiations are changing sourcing strategies overnight.

That doesn’t leave much stability in the overall business picture, but apparel manufacturers still found a way to present a positive outlook for the second half at the American Apparel & Footwear Association’s annual meeting, which wrapped up Saturday at the Fairmont Hotel here.

The AAFA themed the two-day parley, “The Age of Growth,” but many leading apparel industry executives were instead talking about ways to better manage costs and sourcing.

“I can’t worry about those things I can’t control,” said Paul Charron, AAFA’s outgoing chairman, who is also chairman and chief executive officer of Liz Claiborne Inc., speaking to the 210 attendees. He cited examples such as the Arab-Israeli conflict and the macroeconomic effects on the economy. “If you are just [starting to think] about what to do if the economy continues to operate in a recessionary mode for the next 12 to 14 months…I would suggest you are on the road to toast.”

He listed his three biggest concerns: failing to evolve with the customer, failing to retain people and delegate authority and, finally, a retail strategy based solely on price.

In an interview, Charron said he is starting to see positive signs in economic indicators, such as low inflation and the recently passed tax-cut package that could stimulate spending and have a favorable impact on business in the first or second quarter of next year. But he cautioned that retail buying patterns will remain “prudently conservative” in the second half of this year.

“It seems to me many of our retail partners don’t understand brand positioning,” Charron told the audience. “You cannot compete with Wal-Mart if you are going to compete solely on the basis of price.”

Phil Marineau, president and ceo of Levi Strauss & Co., said he is “frustrated” by price erosion at the retail level. “We live in a 99-cent Big Mac world,” Marineau said. “It is oversupplied. Our goal as branded manufacturers is to drive consumption.”He focused on private labels and the damaging effect retailers have on manufacturers when they undercut prices with cheaper versions of branded products.

“We are able to sell [a style of khaki pants] for $34.95 when the average price for khaki pants is $20,” said Marineau. “We have to find a way as manufacturers to go in there and show them there is a way…to get a higher transaction dollar that benefits both of us. It’s a struggle because everyone seems to believe that the lowest price is going to work in our industry and it isn’t.”

Symbolically, Levi’s has renamed “supply chain” internally to “demand chain” because, he said, “We are in an industry that is oversupplied so we have to stimulate the demand.”

Wes Card, chief financial officer and chief operating officer at Jones Apparel Group, said the company today is less reliant on department stores.

“Seven to eight years ago, 80 percent of our business was in the department store sector,” said Card. “Today, at $4.5 billion, we have dramatically reduced our reliance on the department store channel and spread out to other retail avenues.

He said Jones has also set a goal to not open any more warehouses and instead ship directly to the retail customer. “With so much product sold on promotion, if you can feed into what is working quickly and seasonally, it has to be a win on both ends,” Card said.

When Jones bought its Nine West footwear business, it had a six-to-eight month development cycle, which has since been cut to four months by using a test-and-react model in its own chains, as well as in department stores.

“That’s all about speed, reacting quickly and forcing goods in,” he added. “The end result is a better margin because we are constantly feeding into the things that are working.”

Intense price competition is squeezing margins and forcing apparel makers to search for more low-wage production around the globe, executives said. Many said they are closely watching the Central America Free Trade Agreement negotiations, which kicked off another round of talks this week. Apparel makers are seeking liberal rules of origin and high tariff preference levels, allowances to use fabric and yarns from outside of the free trade area. The five Central American countries could offer a proposal on rules of origin this week, as reported.Striking a balance between sourcing in the Western and Eastern Hemispheres is crucial in light of the phaseout of apparel and textile quotas at the end of 2004 and the uncertainty of China’s growing dominance.

Jack Ward, chairman, president and ceo of Russell Corp., said in an interview that he believes China will be a bigger factor in higher-end, labor-intensive production, while the Western Hemisphere will remain competitive in basics.

Ward said Russell, which shifted 95 percent of its assembly operations to Mexico, El Salvador and Honduras from 1998 to 2001, controls 80 percent of its own production in Mexico and Central America and another 20 percent in other countries.

“We can’t find a source today for basic products from China that would be as good as Mexico, the U.S., Honduras or El Salvador, but that could change with trade treaties, the economy or currency devaluations,” he said. “We anticipate over the years seeing more production come from Asia.”

Kellwood Co. sources production in over 40 countries, according to James C. Jacobsen, vice chairman, who said: “Over the past two-to-three years, Kellwood has made a number of important moves, including a series of acquisitions, and has done a great deal of [foreign supplier] consolidation, controlling costs and improving efficiencies, and the net result is lower costs.”

Jacobsen said the timing of CAFTA and the removal of quotas at the end of 2004 is crucial because many apparel makers hope to maintain some production in the Western Hemisphere if the region has flexible rules of origin. He said Kellwood would pull orders out of the region if CAFTA is not commercially viable.

Levi’s sells products to 150 countries around the world and operates its own business in 60 of those countries, according to Marineau, who thinks the quota-free environment in 2005 is a “Y2K” issue that has been blown out or proportion.

“Yes, it is a momentous event, but it isn’t a light switch that will suddenly go on and change things dramatically,” he said. “We haven’t seen what is going to happen to tariffs and we haven’t seen how different trading blocs will respond to this quota change.”Meanwhile, the AAFA saw a turnaround in its financial position this year.

“The association is certainly out of the slump,” said Kevin Burke, president and chief operating officer. “We finished the year for the first time in seven years on the positive side and in the black.”

The AAFA won its contract dispute case in March against VNU Expositions, a division of VNU Business Media, and was awarded a judgment of $3.43 million, according to Burke.

“That gives me a reserve of almost a year’s operating funds with what I already had,” Burke said in an interview. “The association is in good, sound financial shape.”

Charron was succeeded as AAFA chairman by Don Munro, chairman and ceo of footwear firm Munro & Co.

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