Change in the Wind At AAFA’s Meeting

Executives at the AAFA annual meeting said they are adapting to a quota-free trade environment, while dealing with dramatic retail mergers.

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PALM BEACH, Fla. — Apparel executives are adapting to a quota-free environment as they deal with major retail mergers and long-term price declines that threaten profits.

Talk of a more robust economy during the annual meeting of the American Apparel & Footwear Association that ended here Saturday at the historic Breakers Hotel was offset by the uncertainties associated with sourcing in China, the Federated-May merger, the fate of the Central American Free Trade Agreement and maintaining prices while finding product differentiation.

The AAFA’s theme for this session was “Winning Strategies That Connect With the Consumer,” and although the topic was a highlight, it seemed to be overshadowed by the other issues. As the mantra of connecting with the consumer was repeated in the main meeting room, executives prowled the hotel corridors glued to their cell phones for the latest news.

While the Federated-May merger [formally announced Monday] was still in the works, apparel executives discussed the potential impact of consolidation on their businesses after the Sears-Kmart deal.

The new AAFA chairman, Wes Card, chief operating and financial officer of Jones Apparel Group, said the consolidation would be a “challenge.” In its 2004 annual report, Jones reported that about 14 percent of its sales last year were to May, while 12 percent of its sales were to Federated.

“Typically in a consolidation, there is overlap and doors are closed,” Card said. “That would present a challenge and we would have to strategize on differentiation and how we use our brands within the mix.”

However, Card said the merger and expected consolidation could create opportunities “to better differentiate the brands we already have.”

Card’s predecessor, Edward C. Emma, president and chief operating officer of Jockey International, listed the Federated-May merger as one of the most important questions his company will face this year.

“There’s lots of talk about major customers merging and consolidating,” Emma said. “Everyone is wondering what kind of impact that’s going to have on them because there will be an impact. For example…doors are going to close and there will be a consolidation of power.”

The China sourcing issue also topped the list of significant challenges facing apparel manufacturers and importers. Uncertainty surrounds sourcing because of China safeguard petitions that seek to curb its imports. Although the petitions have been put on hold by a lawsuit, company executives anticipate safeguard quotas on key apparel and textile categories from China in the second half of the year. They are hedging their bets on placing more business in the country.

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Paul Charron, president and chief executive officer at Liz Claiborne Inc., said the company sources about 30 percent of its business in China and Hong Kong, but has not yet placed more business in the country because of the potential imposition of fresh quotas.

“No matter what happens, under any circumstances, 50 to 80 percent of all apparel that is consumed in the U.S. will be produced in China by the end of this decade,” Charron said. “Whether it happens in 2007, 2008 or 2010, that’s what it is because all of the components for success are resonant in China.”

Charron claimed China “is not going to be denied,” and will be joined by countries such as Indonesia and India as major manufacturing hubs.

“We have taken a careful approach, and I think most companies have done the same,’’ Card said. “We did not place huge increases in our production in China at the beginning of the year, but we had a slight uptick in what we placed.”

However, Card said he was in China last month to discuss increasing the number of partnerships there. Jones sources 40 to 50 percent of its production, including apparel and footwear, in China.

“They are gearing up for this and as the safeguard issue is resolved over time, that will open things up considerably,” he said.

Another important element on the trade front is the treaty the U.S. has negotiated with five Central American countries and the Dominican Republic, known as CAFTA-DR, which will be one of the most definitive trade agreement battles on Capitol Hill since the 1994 North American Free Trade Agreement.

Many executives wore “I support CAFTA” buttons at the meeting and stressed its importance to their investments in the region.

“CAFTA is absolutely critical for us,” Emma said. “We have several plants in Central America that we own and operate.”

While most apparel importers support CAFTA-DR, which will have an uphill battle in Congress, differences of opinion exist over whether the region will remain competitive even if the treaty is enacted.

Peter McGrath, chairman of J.C. Penney Purchasing Corp., told the group he has “concerns” about the trade pact’s strict rules of origin.

“It may not give enough financial incentives to stop the production erosion in Central America,” McGrath said.

He added in an interview that proximity might not be enough of an incentive for many importers to maintain their business in the region. He stressed that Penney’s will continue to maintain business in the Caribbean.

“If I can get something five to six days quicker out of Central America versus Asia, but the cost benefit analysis is not there, why would I go [to Central America],” he asked rhetorically. “There is no difference then.”

Kevin Burke, president and ceo of  AAFA, said in an interview, “It’s too soon to say the region will not be competitive. If CAFTA doesn’t pass, it will become uncompetitive very quickly.”

Burke said the challenge is that the longer it takes for the trade deal to move through Congress, “the fewer companies are going to want to do business there.”

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