KEY CONCERN: FIBER PRICES
Byline: Michael McNamara
NEW YORK — The big yelp of pain heard around knitting mills these days is the sound of margins being squeezed.
Knitted fabric suppliers are coming off one of the biggest volume years in the history of their business, even as trade agreements and a shrinking customer base force them to be more creative and responsive than ever. But it’s the continuing increases in raw materials costs that cloud immediate business prospects.
Knitters said that despite paying as much as 50 percent more for raw materials this year, they cannot pass most of those costs on to their apparel manufacturing customers. Consumers, knitters said, are not willing to pay more for apparel, and retailers, in turn, are putting the pressure on their vendors. Knitters say they are caught in the middle.
Meanwhile, as more of their apparel manufacturers establish operations around the world, some knitters said they see the need to build plants closer to those foreign markets. Others said they want to become greater exporters of fabrics.
These were among the key points that emerged in a recent roundtable discussion among five knitter executives prior to their industry’s big annual parley — the Knitted Textile Association convention, which begins its three-day stand March 16 in Aventura, Fla.
Novelty fabrics, the knitters said, offer at least a small amount of relief from price pressures. Because most novelty fabrics are often one of a kind and are not rapidly knocked off by low-cost overseas manufacturers, knitters said they can set a price they hope reflects a normal markup.
However, knitters warned that the advantage may not be long-lived. Much as they have with commodity fabrics, Far East producers are learning to create better, more innovative fabrics, knitters said. Quick Response, something suppliers of novelty fabrics haven’t had to use as much as producers of basic fabrics, becomes even more important, they said. Reinvesting in plant and equipment is paramount, knitters added, to maintain the quality advantage the U.S. textile industry enjoys.
The roundtable group, gathered at WWD’s offices here, consisted of: Isaac Kier, chairman and chief executive officer of Lida Inc.; Richard Arnold, vice president, sales and marketing, Cleveland Mills; Regina Carusone, executive vice president, product development, Lee Fashion Fabrics; Peter Frank, division manager, Malden Mills, and the incoming president of the KTA (see related story, page 13), and Peter Lazare, vice president, Gurney Industries.
Here’s what the roundtable participants had to say about these key issues.
How are the rising raw materials prices impacting the knit business?
ARNOLD: “There is a real resistance at the retail level to taking on any price increases, so our customers aren’t able to pass them on as much as they’d like to. From our end, we haven’t been able to pass those increases on to our customers enough to cover our costs.
“Until the situation corrects itself, particularly in cotton and polyester, we’ll continue to be faced with higher costs and we’ll all have to learn to live in a world with prices for raw materials at higher levels then we’ve been used to. That will cause a good bit of disruption throughout all markets.”
KIER: “I don’t think price increases are bad for the industry, although I would like to see them happen in a less dramatic fashion. I think what’s shocked retailers is the huge increase in cotton. Of course when cotton rises, the polyester guys [react] and they raise the price of their fiber accordingly.
“I do think, however, it’s good to have some degree of price inflation in a controlled manner. In the stores, there was a price devaluation in women’s apparel throughout the last quarter, and in January there was a small increase….That’s where the pressure comes to us. Prices aren’t rising for the consumer; they’re rising for the manufacturers.”
[Kier, whose firm is also a major user of Lycra spandex, also touched on the reason why there hasn’t been an increase for that fiber in nearly three years.]
“There’s been a lot of capacity built over the last five years by DuPont. Now Miles’s production is coming on stream. That has prevented prices from rising.
“It’s a supply-and-demand curve. You can bet when we reach equilibrium, you’ll see some price hikes so the companies can start to pay back for the investments. I’d say the increases will happen sometime within the next 18 months to two years.”
LAZARE: “There is a tremendous price pressure in the commodity fabric business, and that’s the business my company is in. Those higher prices are resulting in smaller margins. Because of that, we are looking into more novelty applications.
“Novelties are perceived as value-added products, so they are not nearly as price-sensitive as commodity products. Still, the stores are trying to buy an item for as little as they possibly can. If a vendor won’t take an order for a certain price, there is another vendor who will.”
CARUSONE: “We are primarily a novelty knitter that uses a lot of polyester, and we’ve not been able to pass along the increases we’ve been hit with. “In addition, we are now being faced with imported novelty fabrics that are coming in at price points that are very competitive. This is something we haven’t been faced with before. Those firms that export to the U.S. are not as quick as we are, but they can get share because of price.”
FRANK: “What’s hurting us in terms of price is that a lot of foreign companies are being subsidized by their governments in one way or another.”
The KTA’s mission statement for 1995 and beyond is “export or die.” For knitters, why is exporting important, and are knitters looking to establish production overseas?
CARUSONE: “We’ve been exporting for about 10 years, and exports in the past have been as much as 20 percent of our business. Now it’s about 10 percent. Most of that business has been in Europe.
“I don’t see exports as a total replacement for domestic business, unless something dramatic happens. Right now firms in the Far East are expanding their ability to make better fabrics. I think one place to build the export business is in nonapparel end uses.
“We do feel that there is an opportunity to do something in Mexico because of NAFTA, but that will be through building partnerships.”
ARNOLD: “As domestic textile manufacturers, the only advantage we have is proximity to market. We are here and this is the largest market in the world for our type of product. We have to figure out some way to capture that advantage. We don’t have advantages in raw materials, labor or capital. The importers still have to get their products across the ocean.
LAZARE: “It’s going to be much tougher for smaller companies to break into foreign markets than larger ones. It takes a real commitment in both personnel and dollars.
“And it’s not a short-term commitment. It takes a minimum of three years to break into a new market. You have to deal with new languages, cultural buying differences, shifting currencies and a variety of laws for selling goods. It’s extremely intimidating to smaller companies.”
FRANK: “You can’t just say one day, ‘I’m going to export.’ If you start in a small way and as the years progress you become more familiar with the markets, that’s how you’re going to increase export business.”
“We [Malden] have exported for a very long time. Our business has grown globally, and, rather than build another plant n the U.S., [top management] chose to build a plant in Europe, in Gorlitz, Germany, to be closer to our customers there. But that doesn’t mean we are not going to export. We export to other parts of the world from Lawrence [Massachusetts, Malden’s headquarters and mill].”
KIER: “We’ve looked at a lot of factories in Mexico but we were very disappointed in their accounting practices. There was a serious cause for alarm anytime we examined the books of those companies. Even though there would be savings by manufacturing in Mexico, they are not significant enough to overcome what we saw as tremendous losses for the first few years there.
“Mexico has problems with water, its labor force isn’t nearly as efficient as ours, and the prox-imity to that market makes it such that if Mexico becomes an important market, we can service it from here.”
How important is it to continue investing in domestic knit plants?
CARUSONE: “Reinvesting in plants and equipment here becomes more difficult when we’re faced with the possibility that our customers may not be here in the future.
“When people are looking as to where to spend money, they’re looking at investing around the world.”
ARNOLD: “We’ve invested 1.8 times depreciation for the past 10 years. The Montgomery family [which owns Spartan Mills, Cleveland’s parent company] doesn’t plan on reducing that amount. They are committed to the domestic textile business.”
KIER: “All plants need to reinvest to keep progressing. There is a tremendous amount of new equipment coming out. Investments overseas are more for capacity, as opposed to the U.S., where it’s more of getting advanced technology on-line.
FRANK: “Malden, too, is dedicated to this market. That’s actually why we opened the additional plant in Europe. So in the coming years we’ll have more capacity for the U.S. market.”
LAZARE: “We are the smallest company represented at this table, and it’s somewhat intimidating for a company of our size to see that the Burlingtons and Guilfords of the world are year after year dropping $100 million into their factories. We can’t make those kinds of investments.
“Being a smaller company, we have had to look for more creative ways to find our way through the situation. We’ve opened up our own apparel plants as an outlet for our own products. We have sold apparel products to other manufacturers and, for the first time, we’re looking at completing our first sales to retailers.”
(For the several years, Gurney has been producing T-shirts in a plant at Prattville, Ala.)
Which types of fabrics, novelties or basic goods will be the driving force of the knit business moving forward?
LAZARE: “The basic business is a huge one that will be owned by larger companies. That is forcing smaller companies like us to change. Novelties will be the providence of smaller firms.”
FRANK: “You have to have a balance. You can’t have 100 percent basics because then you’ll sell yourself out of business. On the other hand, most operations can’t have 100 percent novelties because then they’re not going to use their production facilities to their maximum efficiency, which, to have a good bottom line, is a necessity.”
CARUSONE: “Novelties become more important as people seek to differentiate themselves in a difficult retail market. Although what’s a basic and what’s a novelty continues to shift. What constitutes a basic in my business is different than at Lida or Malden or Cleveland.”
ARNOLD: “I don’t think novelties can ever drive the business, simply because the market isn’t big enough. But they can be awfully important.
“They also help sell basic fabrics. If you have a good novelty fabric and your customer wants to pair it with a basic, they’ll probably buy that basic fabric from you.
“We’ve come out with a line of novelty-type fabrics, which is something brand new for Cleveland. Still, even with new fabrics you are constrained by what the retailers are willing to pay.”
KIER: “Our novelty business has been explosive, moving from about one-third of the business to about 60 percent of it in the last year. We’re happy because margins are better, but there are also difficulties, as it puts a strain on resources. We have to keep coming up with new things.
“Still, we don’t want to get out of the basic products we make. We still need to run our plants on a year-round basis, and the novelty business is a volatile one.”