MILLS: LEVI’S CUTBACKS COULD HAVE SILVER LINING
Byline: Scott Malone
NEW YORK — Levi Strauss & Co.’s decision this week to move all but a sliver of its manufacturing operations to foreign contractors gave beleaguered denim mill executives yet another issue to think about.
The San Francisco-based jeans giant is a key customer for most U.S. denim fabric makers and, for some, represents more than 20 percent of sales. In moving to close its domestic factories, the company is following the trend of most apparel vendors, which have turned over cut-and-sew duties to outside contractors who offer lower prices and more flexibility.
VF Corp., based in Greensboro, N.C., is one of Levi’s key rivals in the jeans category and another longtime domestic manufacturer, has also been increasing its focus on contract production and last fall said it would shut 30 to 35 of its domestic plants in favor of contract production.
While the decline of the number of U.S. garment workers paused last month at 527,000 workers according to Labor Department data, the moves by one of the industry’s biggest remaining domestic manufacturers suggest the industry payroll will continue to shrink in the months ahead.
Following the layoff announcement Monday, UNITE president Bruce Raynor called Levi’s “one of the last” big domestic manufacturers, adding that, with the industry shifting to foreign contractors, “it becomes more and more difficult for a company like Levi’s, which once had a huge domestic presence, to compete.”
Observers said as these companies move their production out of the U.S., the question arises whether over the long term will U.S. mills, which are also in decline, find it possible to compete with other fabric suppliers to these companies.
Levi’s officials said the increased use of contract production would not affect its fabric procurement policies and the company’s domestic suppliers expressed confidence that Levi’s would remain an important customer. But some contended that the changes could create opportunity for mills in Mexico and elsewhere in the world to get a bigger piece of Levi’s business.
“We’re very much moving the [manufacturing] footprint to countries where U.S. fabric is…the smartest solution in the medium term,” said David Love, Levi’s vice president of the U.S. supply chain.
The company expects to switch manufacturing it previously did in Texas, California, Georgia and Tennessee to Mexico and the Caribbean Basin, he explained.
As reported, by the end of October, Levi’s plans to close six factories and reduce the workforce at a seventh, cutting its overall head count by 3,600 workers. It will continue to operate two plants in Texas, which employ 822 workers.
John Bakane, president and chief executive officer of Greensboro, N.C.-based Cone Mills Corp. and Levi’s largest denim supplier, said he didn’t think Levi’s move to produce more goods outside the U.S. would hurt his business.
“We pretty much supply just about everybody in this hemisphere, so people that they would use for cut-and-sew, I’m sure, are people that we have supported in the past,” he said. “My understanding is they are changing sourcing on cut-and-sew so they can focus on styling, design and meeting customers’ and retailers’ needs. In regards to fabric sourcing, my feeling is as long as we also support those needs, then their supply-channel flow will be unaffected.”
Further, given Levi’s current financial condition, Bakane said he regarded any effort to improve Levi’s operations as a good thing. Levi’s represented 37 percent of Cone’s $449.9 million in 2001 sales.
“This is part of a well-thought-out and broad restructuring program for Levi Strauss to turn itself around,” he said. “It seems to me that it’s on track. Healthy customers are a plus to all of us in the textile business.”
Levi’s has seen its sales fall from $6.86 billion to $4.23 billion over the last five years, and over that time has cut its head count from 37,000 to 13,000, after completing the current round of cuts. It has shut plants in waves.
Levi’s currently buys U.S. fabric for jeans that are produced outside the U.S.
Still, the migration of production to Mexico has denim executives in that country hoping to pick up more Levi’s business.
Chris Glynn, executive vice president of the Kaltex America Inc. — the New York-based sales arm of a Mexican mill — said he “absolutely” thought there was a chance for him to increase his business with Levi’s.
“There is still a need to have a speed to market. The whole supply chain in North America is under reorganization,” he said. “This is an example of where the supply chain is going.”
Kaltex also offers full-package contract jeans production in Mexico, which he noted is the service Levi’s said it wants.
Jay Self, executive vice president of sales at Greenwood Mills, which produces garments through its Mexican Single Source Apparel unit, said: “We think that possibly, as they relocate their production, that could make more business for us.”
Self, who is based in Greensboro, said he believes the Mexican plant that Greenwood bought in 1995 as the foundation of its Single Source unit is Levi’s oldest contractor in the area.
Nick Hahn, chairman of consultancy Hahn International said Levi’s geographic shift of production will likely give Mexican fabric suppliers an advantage.
Still, he noted, U.S. textile mills, including Cone, Burlington Industries and Galey & Lord, have all developed Mexican production.
“The U.S.-based denim production will have greater competition from Mexican and Central American denim producers,” he said. “If they have plants in Mexico, they will have a little easier time supplying [Levi’s] from Mexico than from the U.S.”