LOS ANGELES — As retail consolidation rattles the industry and manufacturers try to find ways to differentiate their products, factoring companies have had to adjust to a rapidly changing landscape.
During a WWD West Coast financial roundtable here in January, the factors, which lend money to manufacturers against their receivables, concluded that middle-tier companies will feel the pinch of consolidation the most, while there will continue to be a place for niche brands. Private label companies and well-targeted smaller outfits also could be poised to thrive because they, too, are meeting specific consumer needs.
The impact of the retail climate on vendors and the subsequent evolution of the factoring business to better serve clients was a focus of the discussion. The factors said that it has become more likely that their customers will ask them for services other than traditional “vanilla factoring” in response to the transforming climate. Now factors have to be knowledgeable about areas such as temporary staffing, real estate and valuation of trademark assets.
Participants at the roundtable were: David Reza, senior vice president, western region, Milberg Factors Inc.; Jeffrey Enoch, vice president, Rosenthal & Rosenthal of California Inc.; Kevin Sullivan, executive vice president and western regional manager, Wells Fargo Century; Frank Torchen, executive vice president, western regional manager, GMAC Commercial Finance. Harold Dundish, senior vice president, western regional manager, Israel Discount Bank, participated via e-mail.
WWD: What is the outlook for the apparel industry in 2006? Do you foresee credit problems?
Frank Torchen: Our clients are fairly bullish, but also recognize that consolidations will continue.
David Reza: We all have a similar client base in that a lot of our clients are long-term players. They probably, in some cases, benefit from consolidation because as proven suppliers they’ve been asked to do more and they’ve gotten more. At the same time, though, there are probably some examples [in which] they ended up on the wrong side of the equation. These are companies that heretofore were healthy, had very good businesses, and now are finding themselves shut out in favor of companies that were Federated suppliers. Even for healthy companies, there can be some reason to be concerned with the consolidation.
Harold Dundish: With acquisitions and mergers in the retail sector, there will be a reengineering of personnel where certain people, contacts that apparel vendors had, would no longer be with the newly merged company resulting in a loss in business.
WWD: You bring up a good point. What has been the impact of the consolidation that occurred in 2005, May/Federated being the obvious one?
D.R.: In some ways it creates barriers to entry in the apparel industry. We’ve seen some start-ups, in Los Angeles in particular, in the premium denim side. But it does create barriers to entry, and ultimately it’s harder for people to get going, harder for them to attract capital.
Kevin Sullivan: What’s happened is that the retailers would prefer to deal with larger orders to a more limited number of suppliers. To the extent that you’re a big player, it’s likely that you’ll become bigger. We are also seeing a number of start-up companies coming into the marketplace. There’s always a great emphasis on trying to create the next great brand. The valuations in some cases are pretty high for the companies that can create the next brand. Where there are issues are the companies that are in the middle — not a small up-and-coming player, not a large enough brand to be important to the retailers. Those are the companies that we see having some issues right now.
WWD: Does all this consolidation reshape how you’re doing business?
K.S.: The days of being able to say that my concentration in a given credit should be this per client, from a factor’s perspective, you really can’t use that type of thinking anymore. You have to adjust to the fact that you have a much more finite arena of retailers that your client is going to be selling to.
D.R.: Now you have 100 vendors selling one customer, rather than 100 vendors selling 500 customers. It’s easier for us to go and do the credit on one customer, [but] we have concentration issues, we have exposure issues.
Jeffrey Enoch: Over the last several years as this consolidation has continued to happen, we as lenders have become comfortable with the concept of larger concentrations.
WWD: Can or should factors end up as all things to all people? If you’re offering more and more of these services, five years from now, what are you going to have to be doing for the client?
F.T.: The middle and larger factors will continue to do the one-stop [shop] or be able to become the one stop. And I think the ones that are smaller than us, the smaller lenders, will find a niche in nontraditional areas, like temporary staffing for example.
K.S.: Nowadays it’s almost unusual for us to be dealing with a situation where somebody wants just factoring. It’s not uncommon [for us] to do a real estate piece [or be] asked to lend money against a trademark. I think everybody around the table agrees that the days of ‘vanilla factoring’ deals are long gone.
J.E.: It’s not a vanilla market, and I think the four of us might agree that our businesses are on an up growth curve, and the reason for that is because we’ve been able to figure out a way to attract new clients and offer new services.
WWD: How does the international sourcing model complicate the marketplace?
H.D.: We have certainly seen a major change in the apparel industry, more so with an abundance of apparel manufacturing moving overseas. We have also seen [fewer] start-ups of apparel businesses domestically.
K.S.: A lot of the retailers have begun to pull back a bit from doing their own production. Clients of ours that are involved in private label — we’re actually seeing a pretty good increase in business. It’s such a difficult game to play when they don’t have their own brands to augment that volume that everything becomes very price-driven. It’s a difficult environment for these companies to survive. The larger ones are better able to do it. If you’re in that middle tier, it’s all private label.
WWD: What role will private label play?
J.E.: Look at some of the private labels in some of the majors and some of the private labels in some of the chains like Caché and Bebe. That’s where some of our smaller clients are building a niche, in that specialty store range.
D.R.: There’s private label, but there’s also something I’d call private brand. Mossimo/Target, that’s a private brand. They’ve managed to sell their customers the concept of ‘this is a step better than just a private label.’ They pay a little bit more for it, but it’s still a good value with Target, I’m sure. In a lot of cases, I think it’s the same customer that shops at May Co.
F.T.: Private label is big. If you look at figures over the last 10 years, it’s only been growing and eating away at the national brands.
WWD: What are the opportunities for the companies that are challenged?
K.S.: You have to be able to define who you are in the marketplace and represent a niche that your competitors don’t attack as well. It gets back to the whole concept of vanilla. If you’re out there providing a product that doesn’t have a great deal of differentiation from the rest of the marketplace, that [business is] going to fall to the larger companies who can do it cheaper than you can and you’ve got an issue.
J.E.: Innovative manufacturers will find a way, doing fabrications or details or embellishment to at least differentiate their product so they can find their niche. Maybe they can’t grow to $30 million or $40 million [in annual revenue], but they can carve out a nice niche, provide employment for however many people they employ and make a nice living for themselves. It’s not all about hitting the big time and selling out for $50 million.
D.R.: The other challenge for these companies in this middle tier is that they may have a ‘label,’ or we say brand, that is known to the buyers and at some level it’s known to the consumer, too, but they’re getting sales because they have a relationship with the store, the buyer, and those relationships have been set asunder by consolidation.