THE NEW SARA LEE: HOSIERY GIANT SENDS MESSAGE OF CHANGE
Byline: Rosemary Feitelberg
NEW YORK — Sara Lee Corp. has issued a wakeup call to the hosiery industry.
The consumer products conglomerate stunned the industry with its announcement last week that its new strategy was to “deverticalize,” by divesting its manufacturing to focus on marketing.
With 19 legwear labels in a range of price points, Sara Lee, the maker of L’eggs, Hanes Hosiery and its licensed Donna Karan legwear, controls 47 percent of the dollar share of the $2.7 billion retail sheers business. Given the company’s dominance, legwear executives are pondering what it means for the industry as a whole. Many feel it points the way for an industry that has been suffering from sluggish interest in one of its major products, sheer pantyhose.
As reported, Sara Lee, a $20 billion-a-year global giant, plans to take a $1.6 billion after-tax charge in its second or third fiscal quarter to cover this proposed three-year restructuring program. It will sell such assets as textile plants and outsource some administrative functions to cut costs.
“This seems to be the model for the future. I think it’s where the whole market is going,” said John Moretz, president and chief executive officer of Moretz Mills. “In this day and time, to be in the domestic and world market, you have to focus only on your core competencies.”
Sara Lee executives declined to comment for this article, with a spokesman noting that “the company has not disclosed specific plans for hosiery.” The firm’s first targets for divestiture are its 13 U.S. yarn and textile plants related to knit products such as T-shirts, underwear and casualwear. However, it added, in announcing the program, that hosiery operations were also part of the new equation.
While several hosiery insiders admitted “shock” or “surprise” upon learning of the company’s plans to get out of the textile game, most said it was a wise move. To appeal to today’s brand-conscious consumers, it is essential for companies to focus on marketing and advertising to bolster brand awareness, executives said.
“Right now, the hosiery business is a tough business to be in. The most important thing we can do is communicate with the consumer,” said Kathy Reynolds, president of Jockey for Her at Jockey International. “Our business has to be focused on the customers.”
A few executives noted Sara Lee was not as innovative about marketing as it had been in the Seventies, when L’eggs sheers were first merchandised in a plastic egg.
Aware that Sara Lee has cited Nike as an example of a highly successful company that excels at marketing and owns no manufacturing facilities, some industry executives questioned how that winning formula could be translated to hosiery. Legwear lacks the emotional appeal of sports, they said.
However, Frank Oswald, a veteran marketing consultant with DuPont, said the announcement couldn’t have come at a better time for the hosiery industry.
“No classification in apparel needs marketing tied to new and improved products and ideas more than hosiery. Strategically, this move allows Sara Lee to focus on where the classification need is greatest,” he said. “Marketing is the answer for all of us in hosiery, so I applaud the move.”
Sara Lee needs to focus on its L’eggs and Hanes Hosiery brands. Introducing new products and ideas for those brands would make the whole classification stronger, Oswald said.
The fact that Wall Street responded favorably and immediately to Sara Lee’s announcement is a good sign, said Sid Smith, president and chief executive officer of the National Association of Hosiery Manufacturers. Wall Street welcomed the plan Monday when it was announced, running the stock price up 6 3/4 to 49 5/16 on a turnover of 9.6 million shares on the New York Stock Exchange. On Friday, Sara Lee closed at 50 1/16, up 13/16.
“It’s significant to see how a move like this is judged by the capital market,” Smith said.
Last week Smith said he spoke with 12 executives about how the announcement might impact the hosiery industry. “There wasn’t fear or adulation,” he said. “Most people said, ‘Here’s quite an interesting announcement. Let’s wait and see what happens.”
Should Sara Lee actually move to outsource its hosiery production, there would be “significant impact on a lot of companies,” Smith said.
“It would require major changes and renovations for the companies that want to work with them,” Smith said. “Sara Lee is a modern, sophisticated, high-technology company, which is required today to interface, sell and service large retailers.”
Paul Fogelman, executive director of the Carolina Hosiery Association, said he has long been a proponent of outsourcing.
“‘It makes a lot of sense to me. I’ve been pushing the idea, especially with the giants,” he said. “They’re getting more companies to share the overhead expenses.”
Should Sara Lee gain the efficiencies that Fogelman expects it will, the firm could set a precedent for the industry, he said.
“I think others will be sure to follow. It makes them more competitive,” Fogelman said.
A few executives questioned if the ongoing interest in better sheers might be motivating Sara Lee to get out of the production side of the business, since higher margins for better sheers has reduced volume for basic sheers.
Others wondered how the plan might impact the company’s licensed hosiery business with Donna Karan, since without production facilities, Sara Lee would become simply a marketer, just as Donna Karan is.
Sara Lee currently employs about 6,600 people in the Winston-Salem area, where its U.S. textile plants are centered. That’s nearly 4 percent of the work force in the greater Winston-Salem area, according to a spokesman for the Winston-Salem Chamber of Commerce, and about half of those Sara Lee employees are in production.
Under the proposal, production workers are not expected to be displaced. Rather, they are expected to go to work for the new owners of the divested plants, Sara Lee has stated.
But the question remains as to who would buy these plants and presumably operate them for Sara Lee.
Should their businesses continue to grow as expected, European hosiery firms, which are prospering from consumers’ interest in luxury sheers, might be interested in purchasing Sara Lee’s hosiery mills, said Andreas Meinrad, managing director for Wolford America, the U.S. arm of the Austrian luxury hosiery company. However, it’s expected that they would be producing their own product.
“Maybe down the road, some European companies would consider buying the plants to avoid duties,” he said. “BMW and Mercedes have opened factories in the U.S.”
Current duty taxes are 17 percent for imported hosiery and 34 percent for imported bodywear, Meinrad noted.
Unlike the Eighties, sales of basics no longer are the driving force in business, said Karen Bell, president and chief executive officer of K. Bell, a Culver City, Calif., sock maker. The popularity of fashion, junior and athletic looks has made the market more diversified, she said.
“This is something that’s been happening with manufacturers for the last 10 years. The biggest brands out there aren’t vertical,” Bell said. “People have realized they have to do what they do best, and that’s designing.”
“It’s difficult to manage a brand, when you’re committed to the bricks and steel of manufacturing,” said Russ Klein, president of Easton International, which distributes Pierre Mantoux, Falke and Joop hosiery in North America.
Vertical companies often aim to keep machines running up to their maximum capacities, he noted.
“This is a bold and courageous step. They’re looking to the future to say the branded business is here to stay,” Klein said.
Jill Greenwood du Pont, president and ceo of Berkshire Hosiery, said, “It fits in with their flexible sourcing strategy. I think it’s going to make everybody take a good hard look at their fixed assets,” she said.