LOS ANGELES — As the factoring industry continues to consolidate, competitive pressure is reaching a boiling point, and nowhere is this more evident than here, according to three West Coast-based factors during a recent WWD roundtable.
This story first appeared in the September 20, 2004 issue of WWD. Subscribe Today.
The factoring firms, companies that handle suppliers’ receivables for a fee, said new businesses, soaring import levels and the West Coast’s position as the gateway into the U.S. market have created a boom in business.
The pace of growth has been frenetic in recent years. “Evidence of that would be the port of Los Angeles, which has gone from operating from 9 to 5, to being open 24 hours a day,” said David Reza, a senior vice president for Milberg Factors.
According to data from port authorities, the number of imported, twenty-foot equivalent units — the standard maritime industry measurement used to count cargo containers — rose 53 percent to 3.8 million in 2003 from 2.5 million in 2000.
Data for the first six months of 2004 shows imports already outpacing the previous year. Through June, the number of imported TEUs came in at 2 million, 9.5 percent higher than the 1.8 million TEUs reported in the same period a year ago.
It’s figures such as these that have led factoring firms such as Rosenthal & Rosenthal, Milberg Factors and others to open West Coast offices during the past two years.
“I think one of the biggest changes has been China and the influence of China, not only in the apparel industry, but also consumer electronics and consumer goods,” said Mitch Cohen, senior vice president for CIT Commercial Services. “The West Coast is the first stop for product going into the U.S. buying market.” According to Cohen, even manufacturers in Mexico have begun shifting operations to Asia.
“We’re looking more to importers than we are domestic manufacturers,” Cohen said. “The West Coast is going to have a bigger transition from domestic manufacture to importing.”
There’s a mix of businesses popping up, said Reza. “There are companies that are West Coast-based and producing domestically or they are West Coast-based and importing goods from Asia,” he explained. “I think we’re probably seeing more people set up shop here and importing from Asia.”
Cohen said he’s seen more and more Asian companies establishing subsidiaries on the West Coast. Some CIT clients, said Cohen, had done this more than 10 years ago. However, the trend is gaining momentum.
“One thing we need to remember, there’s a lot of competition for factoring on the West Coast,” Cohen added.
Jeff Enoch, a vice president with Rosenthal & Rosenthal, said the apparel business was “still our bread and butter,” but admitted in the same breath that growth opportunities in apparel have slowed.
As Reza pointed out, West Coast apparel businesses have typically been confined to the junior market. “In some cases, it insulates us. In some cases, it has made us more vulnerable.”
Cohen said the West Coast has the “surfwear industry, we have the skatewear industry and we’ve got extreme sports.” He said these businesses tend to be smaller, younger and “more energized.”
There are also other differences between West Coast suppliers and others — especially the start-ups. The factors said the West Coast start-ups have a more entrepreneurial spirit that sets them apart from the more storied East Coast companies. From the factors’ perspective, this means altering their business approach.
“In some cases, there are less obvious nuances to doing business here,” said Enoch, a New York native. “It’s a little slower paced and not as aggressive. Sometimes a softer sell is necessary.”
Meanwhile, the factors are clearly looking to electronics and other consumable goods to help break out from the more niche apparel goods segment.
“We’ve been in this business for 25 years,” Reza said. “When we opened up out here in the late Seventies, we were the poor second cousins to New York. I think there’s been big growth, much bigger growth than in New York.”
Enoch agreed that West Coast growth occurred at a more rapid rate than the East Coast. “Factoring was very young, which is why a lot of us were coming from the East Coast,” said Enoch. “Certainly, the West Coast has come into its own.”
Still, most new companies lack a track record, raising the question as to their ability to survive volatile times.
“This is the garment industry, it’s always volatile,” joked Enoch, who added that a start-up company “hasn’t weathered the ups and downs of the economic cycles. And I think you need to weather those storms. I think the average tenure of a manufacturing company is somewhere between 4 to 7 years.”
And for many suppliers, especially younger companies, the common way to do business is to rely on one or two customers for the bulk of sales. The factors say they are better equipped to handle high customer concentration levels, and sales concentrations are even beneficial.
“I think concentration has driven business to the factoring community because of the additional risk they have to take,” said Cohen.
Enoch believes concentration issues are client-specific. “A company like Wal-Mart isn’t going under anytime soon, so we only have to worry about problems with the client’s production.”
Cohen asserts that concentration issues that arose following the bankruptcy of Kmart, for example, don’t necessarily apply to scenarios such as how to sell to the Wal-Marts and Targets of the world.
“We have to understand who they’re selling to and the model of who the ultimate customer is,” said Cohen. “Wal-Mart is going to be around for a long time. With Kmart, there was a question — were they going to be needed? So what if they left? It’s a different business.”
Smaller factoring firms are recognizing the need of having a physical presence on the West Coast in order to capitalize on this recent boom in business. Ultimately, said the factors, it is still a relationship-driven business.
“Local decision-making has always been very important,” Reza said. “Sitting across the table from management members and being able to respond very quickly helps them to be more responsive.”
The smaller factors will be hard-pressed to catch up to CIT, however, which has brand strength as well as a long tenure in the market. According to Cohen, the company has 125 people working in L.A.
“Entrepreneurs want to deal with people who can make decisions,” Cohen said. “There’s always going to be a percentage of clients that want to talk directly to me.”
*IN TEU’S, OR 20-FOOT EQUIVALENT UNITS, A STANDARDIZED MARITIME INDUSTRY CONTAINER MEASUREMENT.
SOURCE: THE PORT OF LOS ANGELES