CONVERTERS: THE MARGIN SQUEEZE TIGHTENS

Byline: Stuart Chirls

NEW YORK--Domestic converters are under siege as apparel manufacturers, themselves under tremendous price pressure from retailers, look to pass on some of their costs to their suppliers.
From the converters' point of view, it has become a game with no rules, and they contend the domestic apparel industry will be the big loser if what they call "abuses" continue unchecked.
With the Textile Distributors Association annual meeting slated for June 18-21 at the Marriott's Seaview Resort & Conference Center in Absecon, N.J., four converters gathered here at the TDA's offices for a roundtable discussion.
They were David Caplan, president of Metro Textiles; James Gutman, president of Pressman Gutman Inc.; Fred Baumgarten, president of Majestic Mills, and Martin Tandler, president of Tandler Textile.
Also attending were two textile mill executives--James Marion 3rd, president of the TDA and president and chief executive officer of Bloomsburg Mills, and John Cavanagh, president of CMI Industries--and Bruce Roberts, executive director of the TDA.

Q: Whither the domestic converter?
David Caplan: I think the converter is becoming an endangered species. One of the problems we all have is that we are working today on lower margins than we've ever worked on, and I think it all started with the retailer, who was giving the manufacturer a very rough time. Now, the manufacturer is giving us a very rough time with all kinds of what I would call imaginative deductions, which are taking away from that very low margin to start with.
Fred Baumgarten: I agree. There's become a commoditization of many of the aspects of the [apparel] products that are sold at retail, and with commoditization there is the emphasis on price to differentiate your product from another. I don't think that is in anyone's best interest in the short term and certainly in the long term. Let's face it: No consumer needs another one of a certain type of garment strictly because it's half-price. It is our job to create excitement, and we've all positioned ourselves to play a beggar-thy-neighbor role. And in that game, we're all going to wind up the loser.
Jim Gutman: The relationship between converter and manufacturer, manufacturer and retailer, seemed to have become more adversarial than ever. As a result of the squeeze in margins, and the constant focus on price as the only issue, everything has become how to squeeze the last penny out of your suppliers, it seems. This created a destructive spiral that threatens the very existence of the converter, and the textile industry in America.Q: What are the specific problems?
Gutman: We have imaginative deductions coming from questionable claims, the necessity of our industry to pay expenses that were previously paid by the manufacturer, such as freight, and sample charges we have to absorb. In the past couple of years, people have become more desperate, and they take more desperate measures. What needs to be evaluated is the relationship between the converters and manufacturers, exactly what it is. If it continues to be adversarial, we'll consume each other. I don't think many retailers care to understand that the domestic textile industry is necessary for a healthy retail environment. If the relationship could be perceived more as an interdependent relationship instead of an adversarial relationship, then we could all, as competitors, play on a level field, and have our customers treat us fairly because it's in everyone's best interests that that happen.

Q: How has that changed the way you do business?
Gutman: You do what you have to do, reduce overhead, reduce inventory, to bring yourself into a position that makes sense. The result is, the diversity of product that is available from the American converting industry is probably 20 percent of what it was. The manufacturer, or the retailer, says, "Well, I don't see enough different patterns, not enough selection." Well, since there isn't a reward to justify the risk, everyone is playing it safe, and there's a homogenization of product and everything is very boring. And at that point, the only thing left to sell is price.
Martin Tandler: The sales aren't there because the merchandise isn't exciting. Well, of course it isn't exciting. They haven't rewarded us enough to produce it.
Caplan: We can exist--not well--but we can exist, based on the margins we are getting now. But we can't exist on the margins we are getting now minus all of these fanciful deductions, charging us for things that are not legitimate, and charging us for overhead that the manufacturers should be taking care of themselves.

Q: How do you stop it?
Caplan: You fight it, and you fight it, and you fight it. They've got to understand the big picture, and that is that they aren't going to have anyone to buy from domestically if they continue, and if they don't have domestic people to buy from, they are not going to be able to exist.
Tandler: There are fewer and fewer converters who are turning out creative product. And we have to, individually, when we feel we are not being treated fairly, take a very strong position with our customers and refuse to do business with people. That is the position my company has taken from time to time. We don't like taking that position, nobody likes to turn down sales, but we can't survive with people who are not playing fairly with us.Q: Has anyone else here done that?
Caplan: We all have, from time to time.
Gutman: We all have certain people we are very firm in not dealing with. The problem is, there are a lot of companies out there and there's always someone that one of these abusive companies can find to buy from. And sometimes we have very short memories and forget that two years ago we were burned by some company and we say, "Oh, we'll try again."
Bruce Roberts: The way the business is, it's getting harder and harder to refuse an order. But some of these folks do it, and they need to do it.
Tandler: But that is a means of last resort. I try to communicate to the customer first and say, "We don't want to do business with you." The fact that there are fewer of us around makes it more important for some of these people to work with us, and as a result it's possible for us to have more clout, maybe more clout than we think we have. Then, it can actually have meaning to somebody when you refuse to do business with them.

Q: What else does the domestic converter bring to the table?
Caplan: Here's something the apparel manufacturer should think about: It used to be you had three or four seasons a year. Now, market week is every month, and there are 11 market weeks a year. If a buyer orders goods that are going to be shipped two months later, then they need the domestic converter who can turn that around quickly.
Baumgarten: Part of the key to our survival is going to be emphasizing where we add value, whether it is service, the quick response or product and innovation. When we get strictly into the area of price, I firmly believe that there is nothing in the United States that can't be made cheaper someplace else. So we have to emphasize improved service, innovative styling and more efficient internal operations. We are emphasizing computerization and information flow, using this information to pick our spots, and work closer with the people who appreciate the value that we add. And we've got to be wiser about the customers who are chargeback artists and deal with them accordingly.Q: What about your other business partner, the factor?
Gutman: A couple of weeks ago, a group of us sat down with some of the major factors to discuss some of these issues. For instance, a manufacturer will often deduct money from an invoice without any prior notice and we won't find that out until way after an invoice is due. The invoice is net 60 days and we get a notice from the factor 90 days later saying the customer has made a deduction for so-called damaged goods. At that point, there's no way to know if it's legitimate or not; we didn't have a chance to look at the goods, and we didn't have a chance to discuss it with the customer. If the factors can be more vigilant about getting information, it will prevent the claims from getting old and harder to resolve.
Tandler: We are putting a clause in our contracts that we will not accept or consider any deductions unless they're made within 30 days after the customer receives the goods, and we need to know about them in writing. It was in our contracts in fine print...
Caplan: It is in ours.
Tandler: ...and we are now putting it in big print, and this is a condition of doing business with my company. We have to be more proactive about how we deal with this problem. We can't depend on the factors to do it for us, but can work with them so they use their power of credit-checking to get people to play by the rules.
Baumgarten: Apparel is a highly fragmented industry. But if this is going to be used against us by people who feel there is a degree of anonymity and don't want to pay for the piece goods because there are so many suppliers, they should know that it is going to work for [only] a very short period of time.
Caplan: One factor we work with lets you go on-line so you can see if someone's late or is taking a deduction the minute that receivable comes in. But we need more enforcement from the factors, in terms of giving credit to people who aren't legitimate, and the way they conduct their business. We as converters need to decide whether it makes sense to factor. It's not cheap.Q: It sounds as if relationships are the real issue.
Gutman: What we are doing is starting the process of reinventing relationships in this industry, which have deteriorated to a great degree. Then everyone can understand that the way things are working today is not constructive and can't pay off for anyone in the long run. Hopefully, this message will be upstreamed to the top, because so much of this starts with the retailer. They nickel and dime our customers for every conceivable thing and the customers, in turn, have turned that on us.
Baumgarten: We don't want to compete on price. We want to compete on the basis of merchandising and fashion and styling. That way, we don't bid it down to a commodity, we bid it back up to a fashion industry.

Q: What about the relationship with your suppliers, the finishers and mills?
Gutman: The gray mills are disappearing just as quickly as the converters. And the dyers and finishers are suffering, and this, too, is our problem.

Q: What do the mills here think of all this?
Jim Cavanagh: If there are six major converters gone since last year, then that's six fewer customers we have to sell to. Historically, the mills have never really cared what the converters' business was. The bottom line is that the mills need to become more aware of the problems the apparel converters are facing, because we're going through the same problems as a direct result. We need to be more flexible for the converters, to give them the products they can't get here now, that they've been buying offshore for a long time. We complain about it and yet, we're part of the problem. I think we've got to change and listen to what they're saying.
Jim Marion: I would agree, but I would say that the foreign mills are still more service-oriented than the domestic mills.
Gutman: We can go to a foreign mill and instead of paying for a sample line, they give it to us. They make it easier to reduce our up-front costs and bring more products into the States. I think the domestic mills have become more flexible, and that has enabled us to survive. Had they not, I don't think we'd be doing any business today. But I am still doing more import business because I am not getting enough up-front service here at home.
Tandler: Domestic mills are less willing to take a risk because it's impossible to sell a proprietary product. If you have it, anybody can have it.
Gutman: You can only make money on it for a few months.
Tandler: Or minutes.
Caplan: Most of us go all over the world to find goods for our customers, and we've become to a large degree importers, going overseas and opening letters of credit. If manufacturers don't play the game legitimately, it just becomes double jeopardy for us. We've paid for everything up front and they are taking deductions. Well, they're not going to continue to get this great big basket full of creative ideas if they don't play the game fairly.

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