CHRONIC PAIN: CREDIT CHECKS, MARGIN SQUEEZE
NEW YORK — Increased export sales and more direct-to-retailer contact are filling textile suppliers’ order books, but ongoing price pressures and credit problems continue to make the fabric business a day-to-day struggle.
That’s the conclusion of a diverse group of industry representatives who gathered at the offices of the Textile Distributors Association for a roundtable on current business conditions.
Several notable converters and gray mills have fallen in 1996, they pointed out, while other companies race to restructure. To be sure, there are success stories, but each day serves as a reminder of just how tough times are.
Executives said it is critical to check customers’ credit more frequently than in the past, but they also seek creative options — pledging inventory to improve cash flow, retailers sharing the burden of credit on large orders and strategic alliances that speed the flow through the apparel production pipeline. And, as always, offering the right merchandise is the key to thriving amid the chaos.
Participating in the discussion were Burt Larrit, principal of Paradox Fabrics, a converter; John Hickey, chief executive officer of NRB Industries, a gray mill; Gregory Keramis, vice president of Heller Financial, a factor; Amber Brookman of Brookwood Fabrics, a woven nylon specialist; James Gordon, president of Gordon Textiles International, an importer; Richard Phelan, senior vice president of the middle market banking group at Chase Manhattan; Laurence Eisenberg, vice president of Missbrenner Inc., a dyer and finisher, and Bruce Roberts, executive director of the TDA.
Here are highlights of the discussion.
How is business?
Laurence Eisenberg: I think business is starting to look a little bit better. There seems to be more activity at the chains, particularly Wal-Mart and Kmart, and we’re sending our people back to Europe. We stopped for about a season.
Burt Larrit: I agree that things are starting to look up. This is a period that should be good for the converter, and we’re looking forward to it staying strong through February.
James Gordon: We have had a year that’s been an anomaly. It’s been the best year we have ever had. I’m not quite sure why; we worked just as hard this year as we did last year. I think it goes to a few simple issues: If you have the right product at the right time, even in a terrible market situation, the customers will buy. There’s no question that the better end of the apparel business is doing better than the mid-priced market. That reflects macroeconomic trends that are taking place far beyond the retail, apparel and textile business.
Amber Brookman: We are a little different in that we distribute woven nylons, and traditionally, our strong period is the first three quarters of the calendar year, and we had an excellent market during that time. Our forward business is good and well diversified, and we think we’ll be OK into next year.
John Hickey: We’re getting some of the benefits of some of the consolidation that’s been going on in the industry, and the weeding out of the inventory pipeline. We’re starting to see stronger business as a result, and inventories are as low as I’ve ever seen them. We’re having a hard time just getting the material to satisfy demand. So, we’re looking forward to a very strong year next year.
So with business picking up, you must be getting better margins, right?
Richard Phelan: Most of our customers are reporting increases in their order positions, which is the good news. The bad news is that they continue to be under intense margin pressure. I think there’s a finite market out there and fabric suppliers continue to scramble around for the existing business, putting a lot of pressure on margins, so bottom lines are not commensurate with what’s happening on the sales line.
Eisenberg: I agree. Margins are very, very difficult to capture right now. We own our own print plant, so we are looking at volume as well as margin. We’ve got to run [our machines] every day, so we are taking orders that in normal times we wouldn’t take in terms of margins.
Gordon: Although business has improved in general, there still are some weak producers. There is some downsizing going on, both here and abroad. The surviving companies will do all right in terms of volume, but there is still an overhang of cheap goods and cheap sellers.
Gregory Keramis: We saw a number of converters take significant markdowns at yearend [in 1995], so they then reaped the benefits of cleaning house. We are seeing steadier margins than last year and a reduction in bad debts, whereas last year was a disaster for both wholesale and retail.
Larrit: There was a time when I was able to figure out who my competition was, and what my margins were going to have to be to compete. Today, it becomes more and more difficult to know who my competition is and, therefore, what margins I am going to have to work off of.
Has that changed the way people do business?
Bruce Roberts: What I hear from our members almost across the board is the problems they have trying to check their customers’ credit. It’s a disease that is impacting their business significantly. It’s hard enough to write business, according to them, but once you write it, you’re not able to get a check.
Keramis: The guidelines for credit haven’t changed. We still require up-to-date information. But I think what is happening is that we can’t go two months without some sort of an update. It’s becoming a monthly chore to stay on top of the current operations. We’re requiring cash flow and projections, where before we didn’t put so much stock in those because it’s difficult to project your business. But now it gives us a feel for the converters’ cash needs going forward, and whether they’ve secured the financing to meet those needs. That’s been criteria that’s been difficult for some converters to come forward with. Factors don’t make money by saying no, but it becomes that much more difficult to find a way to say yes.
Do you consider alternatives?
Keramis: There are times when we have to secure the credit situation, have to bring side collateral into it, letters of credit, guarantees, anticipation — all these things to try and find a way. The key has been cash flow. It’s loosened up on a policy for many mills and factors where the pledging of inventory became a black eye. Now, we say go out and use your inventory for funding. If that enables you to beef up your cash flow to the point where you can pay people on time, go ahead and do that. So, take a valuable asset today, use it for financing and pay your suppliers on time.
Phelan: I agree. We recognize the difficulty in getting realistic projections, given the uncertainties in the market. We just use them as sort of a road map in order to track the progress, then monitor that progress on a monthly basis without exception. That helps us understand the dynamics of the business. For example, if a company’s sales are falling off, then it should be cutting back on its commitments. There has to be a give and take, and more of a management of the business in a dynamic situation. But the bankers don’t run the business; the management runs the business.
Hickey: What we try to do is improve the quality of our customers in terms of credit worthiness. We look at the market segments we deal with with an eye toward those who are secure financially and move away from those who aren’t.
Larrit: Another problem is that because people are buying so close to season and because retailers are sometimes making the decisions as to which manufacturers they want to be the cutters, you can wind up with a rather large order for one or two manufacturers. And no one factor is going to give that manufacturer all of the credit necessary to do business. So we have wound up finding ourselves in a bind on a number of occasions, torn between wanting to take the order and not being able to get the credit.
Gordon: Forecasting is a fundamental that’s changed as a result of the consolidation in retailing that’s taken place. Retailers are making their buying decisions based on financial factors, like how can they maintain planned gross margins. The answer to that is either to pass the buck back to their suppliers or buy on a basis that minimizes the length of time they are going to be carrying inventory. There’s no short-term solution, and it’s something that has affected the ability of good businessmen to accurately forecast their business.
Eisenberg: There is a new phenomenon where we are actually billing the retailer and shipping to the cutter. The eventual outcome will be fewer manufacturers, retailers developing their own cutting facilities and, ultimately, a converter or mill with the emphasis on retailing and a deemphasis on manufacturing.
Is there more business being done directly with retailers?
Keramis: We are seeing it to a limited extent because of the credit requirements. To assist in the purchasing, there will be a retailer who will take a certain amount of billing. If a shared situation is inevitable, we’re not going to hold back on it. The client’s growth is the most important aspect of what we do, so if that means sharing the wealth [responsibility], that’s what we’re going to do and ease that transition as best we can.
Eisenberg: We’re doing more business with L.L. Bean, Lands’ End, Gap than ever before. That’s a direct business. That’s not involving a manufacturer. They’re shipping goods to a contractor, and there’s more and more of it. They’re making the marketing decision rather than going to a manufacturer.
Is that the future of the business?
Gordon: There is a kind of partnering that is taking place. Because the retailer frequently wants a complete package where they pay for finished garments, they are stepping in where the financial demands are excessive for a contractor. I don’t think the things we have talked about are that different. What may be different is how one textile company is in a position to supply finished garments directly to their customers. It’s a little early in the day, but I think it’s an interesting vision as to what the textile business might look like five or more years from now, when companies are forced to go further and further downstream in terms of finished product than they ever had in the past.
Hickey: I think those are trends that are going on in all industries. We’re not the only ones in such a competitive environment. Look at the automotive companies who are getting their suppliers to integrate vertically; [creating] strategic alliances along the production chain, to give them a lower cost and just-in-time product, but also to remain flexible. You’re better off being able to work with different manufacturers on different products than doing things totally vertically.
Brookman: A key factor is resiliency. The industry has proven itself to be pretty resilient. We feel it’s no one strategy, but a consolidation of ideas. For us, it’s how do we niche-market to support the core business where margins are continually threatened. And where our company has always been a domestic supplier, we are now becoming a global distributor. And through [the North American Free Trade Agreement], we can continue to broaden our strategic base.
Is the “internationalization” of domestic suppliers a foregone conclusion?
Brookman: [Apparel production] from abroad has become important to us….We have been building relationships overseas, and we feel that there’s an opportunity there.
Gordon: There are opportunities for American-made products, if it is the right product, and if it is competitive, which doesn’t necessarily mean it’s the cheapest. The opportunities are not as great as those flowing the other way, but there are certainly opportunities.
Phelan: There’s also the increased credit exposure of doing business overseas, which many companies are reluctant to do. And when you have a credit situation domestically, it gets exacerbated when you sell overseas.
Gordon: International business is letter-of-credit business, and there is a growing trend abroad to sell the American market on open terms because there are nationally subsidized export credit guarantee insurance companies that pool their knowledge.
Brookman: I’ve spent five years learning about letters of credit, and they are utterly terrifying. You have enormous exposure on fabric over on some other end of the world, and you’re hoping that every “i” is dotted and every “t” is crossed. That has made us very conservative. It’s a very unknown world for people who haven’t worked in the business.
Converters have said factors must help them more to enforce the terms of purchase agreements. Do you agree?
Keramis: We can’t render an opinion on the validity of a dispute or a deduction; we can only act as a referee to try and bring it to some sort of fruition. We’re caught in between. We try to remain involved, keep the parties talking; try to do a little more than just say the dispute is your problem. We try to be a partner, even though we can’t make that decision of who’s right or wrong, because we realize that in the event of an arbitration, that could come back to haunt us. But factors are easy targets because not everyone handles it this way.
Roberts: This situation has improved somewhat since we had a meeting earlier this year with several factors, including Heller. We need you because you are the ones with the muscle. We as converters don’t have that muscle.
Keramis: Well, we want to resolve these disputes as quickly as possible, while we know the condition of the customer. If that condition deteriorates, we could be in a situation with a customer where we, too, are having difficulty collecting receivables.
Larrit: Being in business as long as we have, we try and avoid dealing with the type of customer who we know is going to ask for proof of delivery on the 60th day. If we find that we picked wrong, we try to deal with the claim as quickly as possible by either eating it or negotiating it, then deciding that we aren’t going to solicit that customer again.
Brookman: I can’t think of an instance where we have gone into dispute where there hasn’t been some other problem with the customer.
Keramis: You have to be more selective about who you do business with.
Roberts: Within limits.
Larrit: At the end of the page, you see whether you did or did not make money with the customer. If you didn’t, then there’s no reason to do business with the customer again.
Of course, everyone is working smarter. Does working smarter mean being a merchandiser as well as a supplier?
Gordon: I don’t think it’s our job to educate retailers. The more appropriate question is, how do we in the textile industry position ourselves in a much more complex market? There are more older consumers, there is the continued casualization of the market and the big apparel brands, especially, are catering to a growing ethnic market…
Larrit: It’s our job as converters to figure out what the next step of fashion is. That’s what we’re here for. Otherwise, we’d be a mill making just what our machines make.