COPING WITH RETAIL, IMPORT WOES
Byline: Scott Malone
NEW YORK — Converters are facing a puzzling world.
The apparel business is proving to be an increasingly challenging one for them, as imports represent an ever-greater competitive threat, which will only grow in 2005, when quota restrictions are lifted among all World Trade Organization-member nations.
Specialty apparel — like the high-tech jackets favored by mountaineers and those who want to dress like them — is proving to be somewhat of a safer opportunity, but for many companies it represents too small a segment on which to build a business.
The recent grant of trade parity to apparel made to nations through the Caribbean Basin Initiative, which includes a mandate that U.S. fabrics be used in many cases, offers some hope. But there hasn’t yet been a rush of demand for lots more CBI-qualified fabric and industry executives aren’t quite sure when that demand will materialize.
Still, companies can survive, if they play all their cards right — cutting their costs, importing supplies when they need to and finding market niches where they can eke out a higher margin — which sometimes means escaping the tumultuous apparel market.
That was the consensus of a group of Textile Distributors Association members, who last week gathered at the organization’s Manhattan offices for a roundtable discussion. The group included: three converters, Amber Brookman, president of Brookwood Cos.; John Irwin, vice president of Malibu Textiles Inc.; and Gail Strickler, president of Saxon Textiles; one gray-mill executive, Peter Dutoit, president of Inman Mills and one yarn spinner, Jim Chesnutt, president and chief executive officer of National Spinning Co. Bruce Roberts, executive director of the TDA also participated in the discussion.
WWD: Assess the current state of the apparel textile business.
Strickler: I believe that the only textile business really that will exist in this country is what is not apparel-based. If it is apparel, it will only be highly technical apparel, military apparel, or really specialty products.
The textile business that is going to exist in this country is really more geotextiles, military, industrial. You’re basically going to see less and less apparel fabrics being made in this country. I just returned from the Outdoor Retailer show in Utah and you could see the evidence there. You can see millions of square meters equivalent that are coming from Asia and will continue to come from Asia.
The one highlight on the horizon is no matter whether everything is made in Southeast Asia, or the Caribbean or wherever it is, there’s still a market [for high-end textiles].
No matter how many people go out and buy a ski jacket for $69.95 or less at Wal-Mart, there’s always a market out there buying $500 and $600 technically advanced parkas, and that market will continue to exist. [The jackets] probably still will not be made here, but we can have innovative fabrics in that niche market.
Brookman: There are other challenges for the industry. We’re a unionized plant and the union’s gotten increases every year. Last year, I truly believe the Fed made a huge mistake for business, raising interest rates, which impacted us hundreds of thousands of dollars. We drove down inventories and simultaneously our insurance costs went up 20 percent. In addition to that, we had energy go up $250,000 to $300,000 a year, and that’s with energy conservation.
Dutoit: We are still a gray weaver, which is sort of becoming extinct in this country, although we’ve been consolidating our production. We are still modernizing some of our production and even though we have a strong home furnishings business, we have not run away from the apparel business.
I do not think that we have seen the benefits yet from CBI. I have seen a lot of interest from people who [previously] wouldn’t talk to domestic mills in the last three or four months, since the CBI initiative has taken effect. This is apparel-related legislation and I think that in some ways it’s going to help us.
Our main difficulty in apparel and retailing in this country is that the retailer has given up promotion marketing and the only thing they’re willing to do is sell on price. Every time they go out to buy something they want to buy it cheaper. They don’t care that the raw materials costs are up. So, it’s going to take a little reeducation of the retailer, and I’m not sure how that’s going to happen, whether they get some competition from the Internet or other retailers, like a Kohl’s coming out to take some business from Target and Wal-Mart.
Chesnutt: We are predominantly an acrylic spinner. On the apparel side of the business, we had an incredibly good fourth quarter from a volume point of view. The only reason it was a successful quarter, from a financial point of view, is we have driven cost out of our system and that’s what we have to do.
We focus every day of our lives on driving cost out, fully understanding that the [apparel-making] customer is still concerned about buying cheap to deal with those retailers, that in my mind, are doing the poorest job of any segment of the country. They’re trying to stay alive on the backs of their suppliers, whether their suppliers are in the U.S. or offshore.
I think they’re doing a horrible job.
They’re overbuilt, they don’t merchandise very well. They beat up our customers. I spent 25 years in the cotton business and then came over here. We have a craft division, that sells the major retailers and my sympathy for our customers certainly changed when I got into an organization that deals directly with the retailer. It’s a new experience.
I’m concerned about the apparel business. We are a big supplier to the sweater trade. We think the stores are empty, in terms of sweaters, scarves, mittens and toboggans [knit caps]. That boasts well for that piece of business that we do.
We have focused on doing more in the non-apparel end of the trade: industrial fabric, home furnishings, hosiery, upholstery. Those people are looking for something different.
We have a hosiery business selling to the people like the Nikes, Reeboks, Thorlos. Those kinds of people are beating the trail to the door and asking for products to be developed that wick better, that do away with odor, are anti-bacterial, all kinds of products. The acrylic hosiery business is very, very strong on the technical side.
But, we all have to understand that many of our customers need help in making decisions on working in the Caribbean.
It seems to me that this legislation does have an opportunity to keep some apparel business in this hemisphere. The retailers that I speak to talk about fast turns. When something’s hot, they need it back quick and they can’t do that from Cambodia or Vietnam, but you might be able to do that from the Caribbean.
In terms of fiber prices, our average sales price was up two cents a pound last year, our average fiber price was up 17 cents a pound. Try to make those numbers work.
But I believe short of an absolute recession, and the consumer stopping dead in his tracks, that this year has an opportunity, in our part of the business, to be OK. I didn’t say great, but OK.
Irwin: Do the retailers actually pay for highly specialized, technical fabrics?
Strickler: [Apparel-making] customers do. So the retailers better learn.
Irwin: With all that’s going on with these markdowns? We’re specialty, we make laces, novelty fabrics, metallic sheers, fabrics you find in the dressier trade, higher price points, small volume, small runs. Even our customers are getting price pressure that’s unbelievable. The markdown money — unbelievable. Hundreds of thousands of dollars every season and we have fewer and fewer people to sell.
Roberts: There’s no need to tell you that these days the fiber suppliers are not very happy with their margins at all. They are not doing very well. You see fiber companies disappearing. There’s only one reason for it. They’re not making any money. While they’re passing along some of it to you who can’t swallow it, they’re doing poorly themselves. We need to keep the fiber suppliers domestically operating. You’re talking about innovation. You used to get tremendous help from the fiber producers in terms of innovation. Now it’s very difficult for them to afford the research and development to do it.
Dutoit: It’s not just the textile business. All manufacturing in this country is in trouble. Look at all the layoffs that have been announced lately. It’s very difficult now to manufacture anything in this country and survive. I think we made our bed and now we’re going to have to sleep in it for the next couple of years.
WWD: Are any of you looking at moving some or all of your manufacturing and sourcing out of this country? If manufacturing in the U.S. is the problem, why not do it elsewhere? Dutoit: We have looked at putting a mill in one of the Caribbean countries, and Mexico before that, and frankly we couldn’t justify it. We really felt that we couldn’t weave or knit in those countries cheaper than we could here, because labor has become such a small part of our total cost.
But other people are doing it. In Guatemala there’s a few vertical companies. I heard that sub-Sahara [the region of Africa] now is getting a lot of influx from Pakistani and Turkish companies. Korean companies are now looking at some of those countries and what will happen there is what happened in the Caribbean.
First, they’ll go in with knitting, which is very easy and inexpensive, relatively speaking. The next thing you’ll see is some weaving going in. Weaving is going in a lot slower. There’s not a lot of weaving being done in the Caribbean.
Brookman: The people that are putting plants in foreign places are people who have had high profits for the last few years. We have been working on reducing costs, overhead across the boards and surviving.
The capital investment that our company has put in our finishing plant is millions of dollars, but it was to diversify the base of the plant to make the type of plant that comes up, down, up, down which is how the market is. To go off to Guatemala or to Mexico, where there’s no water — there’s an immediate challenge to put a finishing plant in an arid country. You can’t justify the capital investment in finishing to put those plants somewhere else than America. There’s no way.
WWD: Given that there is no reason to expect that retailers over the next few years are going to stop marking things down, and presuming that we’re going to continue to face competition from overseas, what can companies do to be more competitive?
Irwin: Specialization. You have to come up with products that you can turn fast. We turn product in four to six weeks. We’re always into a new kind of item. They’re all novelty driven, but you’re talking about very small volume. These are a few thousand yards, maybe 10,000 or 15,000 and we’re onto the next item.
We’ve had competitors go out of business, even in our trade, because the market’s shrunk so much. They didn’t change their product lines and come up with new ideas of embellishment and they didn’t survive because of it.
Strickler: We have to look at competition as competition for the consumer, not for selling the product.
That competition is going to come from something that’s special, that’s different, where the competition is for the sale of new outerwear, a new sweater, that is going to be superior to the products on the market.
It’s not competing to see if we can sell it to Target for $6 a dozen instead of the $8 a dozen they are paying now. It’s going to be that we are selling it for $6 a piece or $8 a piece, but the [retail] customer is going to be willing to pay for it because the consumer is willing to lay out $25 or $30, because the product is superior.
Chesnutt: You asked about moving to CBI countries and to Mexico. From a yarn spinner’s point of view, there has been only one move that was made. Duke Kimbrell [chairman of Parkdale Mills] went down in conjunction with Burlington for a plant. No other yarn spinners have gone down, and I think there are a number of reasons for that.
First and foremost is power than you can count on on a daily basis.
Secondly, if you really look at our business and particularly for those who are not involved in color, it is not labor intensive. The CBI rules and NAFTA do favor the yarn spinners a great deal if we can be successful in making apparel in those countries.
WWD: Could textile and yarn companies follow the model of apparel companies and get somebody else to actually make your products so that you could focus on design and sales?
Brookman: We have a seconds division in our company. At least 60 percent of it is now an import company. But we are shipping [products made by other companies located in] Asia to [customers in] Asia.
We resisted a long, long time and we keep it pretty isolated to our seconds division. When we can’t be competitive, we bring in some imported fabric. We believe shipping Asia-to-Asia product is going to be a part of our diversification process. We have no intention of walking away from our dyeing and finishing business. On the other hand, our company does have to survive. We have diversification in our plants and diversification in our business.
Chesnutt: We close down old, inefficient spinning and we buy all the quota of one country’s gray yarn that we will bring in and dye in Washington, N.C., to use our dyeing capacity. You have to watch what you do with that yarn, because it can’t go to Mexico and it can’t go to the Caribbean [if the resulting garments are to qualify for NAFTA or CBI trade benefits]. It adds another administrative issue to the business.
Strickler: About 20 percent of our business right now is Asia to Asia, but I don’t think that’s really an issue of the survival of the U.S. textile industry. We are becoming a virtual company to the same degree that all these so-called manufacturing companies that don’t own a stitch of manufacturing are. What real added value does that have, other than the innovation and the creativity of individuals within our company that come up with those fabrics or style those fabrics?
Chesnutt: Our company in the apparel trade does not deal with the big hitters. We deal with lots of closely held family-owned businesses. The guys that are running them are like me, a lot of gray hair. They are not looking to do things differently.
WWD: Is the best opportunity for U.S. companies high-performance specialty products?
Roberts: This has been the cry of this industry for 30 years. It’s nothing new, it’s just more critical that we do it now. But that means you’re throwing away 90 percent of the business. You’re giving it up. I don’t think you need to give up 90 percent of the business. I think you need to give up 50 or 60 percent, but I think there’s going to be some business in this industry. Maybe not the last man standing, but the last few standing are going to do some business.
Chesnutt: There are a few low-tech products that have high-tech marketing and merchandising that do very well. I love Jim Throneburg at Thorlo. His product is somewhat different, but he is a marketing genius. If you’re a runner and you wear his socks, you better buy your shoes a half-size larger. Because otherwise they won’t fit. And then you can’t buy anyone else’s socks.
Dutoit: You do your research and development, you come up with an innovative product, you get it out there and it’s going to get knocked off. You mention Thorlo. Their trademark is the heel and toe pieces that are a different color. You can go down to 32nd Street and buy nine pairs for $10 and they have the heel and the toe in the different color. It’s not the same sock and it doesn’t feel the same, but people are buying them.
Strickler: Is it all going to be technical? No. The other side is going to be quick-turn, very fast response, small amounts and that type of thing.
Ninety percent of our business is going to be lost because we’ve probably already lost 60 to 70 percent.
Roberts: You haven’t lost that much yet. You’re sliding in that direction, but you’re a long way from having lost 60 percent of your business.
Strickler: There is one bright side. Since the NAFTA agreements took place we have seen a complete change in where apparel imports are coming from. As of 1998, Mexico became the top apparel supplier to this country. Proximity does mean business and that’s very clear.
The other side that isn’t getting mentioned because we keep talking about CBI is all of South America. As its standard of living increases, those people become potential customers for us also. That is the potential in this hemisphere if the U.S. continues to be able to make labor unintensive products like textiles.
If we maintain the technology of our equipment, if we can have quick turn, if this hemisphere does continue to increase in its standard of living and the potential customers are there, is there a market down the road that will continue to increase for some of our product?
The answer may be yes, but only if we maintain the quality and spend money on research and development and equipment upgrades. That’s going to be very hard to keep doing.
Chesnutt: If you’re going to be successful you must be able to identify and serve those companies who are going to follow the cheap needle. We must figure out who are those people that are going to be in business and can we serve them from here.
Do we have our strategy for 2005? No. I’d like to say that we did. I guess 2001, as we would say in the South, is a heap more important right now.
WWD: There’s a lot of talk that there’s still a need for consolidation in this industry. That word can mean going out of business or merging with another company. Do you see any opportunity for mergers?
Brookman: I do not think there is an opportunity to consolidate converters, because what is a converter? It’s one president with some hot salespeople. Consolidate what? You’re hoping they decide to close the doors because you’re just going to pick up that business.
I saw, in 1990, a huge consolidation opportunity for finishing when business was strong. I certainly don’t see buying plants and equipment now. You’d really have to think before you went out and bought more plants and equipment. I don’t see consolidating the finishing side.
Chesnutt: Twenty years ago, this city was full of converters that did an unbelievable amount of business. Those guys, in my mind, are the most important resource that we all have and we need to be teaching them how to identify how they’re going to sell fabric made in the U.S. to people in the Caribbean and maybe even in South America and Mexico.
Some of the converters that I see are doing the same old, same old every day. Trying to sell the same old apparel manufacturers here domestically. They are not looking for those opportunities offshore. We need an education process to teach those converters.
Brookman: As a converter, you don’t have the breadth of understanding of all the laws nor do you have the staff available to explore those opportunities.
What some of our mills are doing is using it as an excuse to enter our markets. It’s a bloody free-for-all out there with everybody sliming everybody. That, to me, is an outrage. Some of the mills are using this as an opportunity to compete with their customers.
Irwin: We’ve been having meetings over the last four or five months about trying to find ways to sell more of our product overseas. But since we’ve never been there, we don’t know where to start. We have no idea what to do in the Far East, who to go see, who to contact. We’re not familiar with any regulation whatsoever. That’s something we could seek some help on. We have a product that we know we could sell overseas, because it is specialized, it is novelty-driven, it’s very fashion-oriented. They crave those ideas. If we can get in there first, it’s one area we could probably expand. But we don’t know where to start.
WWD: What’s your outlook on the apparel segment of your business for the next six months?
Dutoit: I don’t think the next six months will really give us a big influx on CBI. I’d like to think it will, but I’m not sure that is going to happen. The interest is really up. We’ve met with a lot of converters that previously had no interest in speaking with us and the reason they’re speaking with us [now] is they’ve gotten inquiries from customers that had no interest in speaking with them until CBI. So all of a sudden they’re getting the inquiries on domestic goods. It’s starting to happen.
On top of all that, it’s been a pretty horrible season at retail. They’re working off some inventories. A lot of that has to be digested. We track bill-and-hold, which is unique to the gray business — we bill our customers and we hold the goods for them. That probably is 20 percent higher this year than it was last year. Our mill-owned inventories are maybe five percent higher than they were. We’re taking certain steps to keep our inventories down.
Everybody is working closer to the vest and I do believe maybe in the next four or five weeks we’ll start to see some business pick up.
Chesnutt: This year has the opportunity to be OK.
Today we’re running every piece of equipment we own as full as we can run it. It’s been a while since we’ve been able to do that with a great degree of confidence.
For some reason, some of the retailers are coming back for a few items domestically. I think there were maybe some disappointments last year.
It doesn’t mean the price pressure is easier, but on the sweater side and the fabric side, we feel pretty good.