AS TIMES GET TOUGHER, U.S. MILL EXECS SEARCH FOR WAYS TO SURVIVE
Byline: Scott Malone
New York — “Don’t count us out yet. The industry has got to change, but it will.”
That’s the word from George Henderson on the state of the U.S. textile industry. While the chairman and chief executive of Burlington Industries Inc. acknowledged that the sector is facing considerable challenges over the years ahead, he contends that it can overcome them.
He’s not alone in that belief. A group of executives at top U.S. mills and industry observers interviewed by WWD concurred that, while the domestic textile industry has a rough road ahead of it, the steps being taken by leading firms to rethink the textile business, adding non-U.S. production or getting into the business of making garments, offer the hope of survival.
But without question, for the last few years, the news in the textile industry has been grim: Thousands of jobs have been cut, major companies have fallen into bankruptcy and the industry as a whole ended 2000 in the red.
That’s been during one of the U.S. economy’s longest boom periods in memory. Now, as the economy begins to cool off, the question that arises is whether domestic mills will be able to hold on.
Probably they won’t all be able to, industry officials said. But that might not be a bad thing, they contend, as they believe it may result in smaller, healthier and more viable industry.
“Certainly the inefficient production and the non-modern production is being rationalized and shut down,” said Keith Hull, president of marketing and sales at Avondale Mills Inc., of Graniteville, S.C. “I think we’ll see, in five or 10 years, a set of much stronger players that is going to emerge. But definitely we’re going through a transitional time.”
The domestic industry’s challenges are clear. Foreign fabric and garment makers are able to undercut U.S. mills on cost. They will become even more of a threat in 2005, when quotas on apparel and textiles are eliminated among nations that are members of the World Trade Organization.
At the same time, powerhouse retailers and branded marketing companies, recognizing that the percentage of American consumers’ discretionary income spent on apparel is shrinking, are hammering home the message that fabric prices cannot rise. Wages may remain high, fiber costs might increase, energy bills may go through the roof, but retailers are not willing to raise their clothing prices.
Nonetheless, mill officials argued, the industry also has opportunities ahead of it. Textile companies are pursuing a number of strategies, which they believe can help them to remain competitive in today’s brutal market.
Several top domestic textile houses, including Burlington Industries and Galey & Lord, have built or bought mills outside the U.S., primarily in Mexico, which is close to the American consumer market and has lower wages. Executives have reasoned that this will prove to be a way for domestic mills to sell lower-priced fabrics profitably.
Other companies have tried their hands at full-package garment production, offering branded apparel companies — many of whom no longer own their manufacturing facilities — the chance to buy completed garments made to their specifications, rather than bulk fabric. While executives and some industry observers were initially enthusiastic about this move, cutting and sewing is much more labor intensive than running looms and the transition has proven to be a difficult one for textile companies.
Another alternative a few people are starting to suggest for the textile industry is following the path of major apparel companies — focusing on designing and marketing fabrics, but contracting out the actual production. Most industry executives interviewed were skeptical of this idea, worrying that it would eventually lead their customers to begin buying fabrics directly from their suppliers, cutting their companies right out of the business.
American textile executives are also working to capitalize on their one inherent advantage — they are located in the world’s largest consumer market, which makes it easier to stay in touch with what shoppers are looking for and means that they can get products to their customers all the more quickly.
“There are two things that we have been working on over the last five years, to become more meaningful to our customers,” said Greensboro, N.C.-based Burlington’s Henderson. “You can give them a product advantage and you can give them a speed advantage. What we have emphasized is fashion and speed.”
With retailers and wholesalers focused on keeping inventories trim and ordering closer to season, the speed advantage of domestic production is touted by most remaining mills.
Jim Martin, president of apparel fabrics at Danville, Va.-based Dan River said that, in trying to compete with overseas mills, “we have the quality, we have the capability. We often do not have the correct cost.”
Recognizing that liability, Dan River also focuses on speed.
“What we try to do is work on quicker turn time,” Martin continued. “The whole industry has got to get faster. If we’re going to be more expensive, then to get value to the customer, we have to be faster.”
But officials acknowledge that a focus on quick turnaround hasn’t been enough to keep their companies profitable in recent years.
“The financial status of the industry is probably at one of its lowest points ever,” said consultant Mary O’Rourke, managing director at the Jassin-O’Rourke Group, here. “I don’t think that it’s dying, but I think that it’s consolidating, and it’s consolidating significantly in some areas. There is too much capacity+.We need to see some mergers of companies.”
While there haven’t been any major mergers of U.S. textile companies over the last few years, there have been plenty of plant closings.
In 2000 alone, Burlington laid off 1,600 workers and closed two plants in its wool-and-synthetic fabrics division. Galey & Lord Inc. cut 1,340 jobs and shut an aging denim plant and its yarn-spinning operations and Guilford Mills dropped 550 employees and shut two knitting mills.
All three companies said the plant closings either allowed them to stop running older, inefficient looms in favor of more modern equipment or provided them an exit from unprofitable product categories.
But the charges related to the closings took a toll on their bottom lines.
According to American Textile Manufacturers Institute data, the overall industry took a $300 million loss in 2000, compared with profits of $700 million a year earlier. Burlington’s move to write off all its $473 million in goodwill was enough to yank the industry into the red. Still, margins are razor-thin — total textile shipments were $77.1 billion for the year, off 1.2 percent.
Thin margins aren’t the only sign of the industry’s precarious financial position. Over the past year, knitters Glenoit Corp. and Dyersburg Corp, weaver Texfi Industries and spandex maker Globe Manufacturing Corp. all filed for bankruptcy. Narrow-elastics and covered-yarn maker Worldtex Inc. has warned that a filing is likely in its future, as well.
Wall Street has also lost much of its interest in the industry. Six apparel fabrics mills remain listed on the New York Stock Exchange. None of their shares have reached the $10 mark in the last year. Dyersburg and Worldtex shares now trade only over-the-counter for well under a dollar a share.
(Yarn texturizer Unifi Inc. and polyester maker Wellman Inc. have held onto higher prices and their Big Board listings.)
Still, the remaining equity analysts focusing on the industry say the short-term pain that restructuring has caused textile companies over the last few years may prove worthwhile if it means survival.
“Certainly there are parts of the industry that will not exist in the future in their form of today. What I see happening is that companies are reinventing themselves,” said Kay Norwood of Wachovia Securities Inc. “That’s why you are seeing so much activity in the industry. I don’t think it’s the equivalent of moving the deck chairs on the Titanic. I think it’s more like moving the pieces on a chess board.”
She said that Burlington and Galey & Lord have been wise to close aging or unprofitable plants, and that those companies will be better able to face the challenges ahead with those problems behind them.
Those two companies have also built up substantial Mexican fabric-making operations and set up alliances with overseas products — in India for Burlington and in Tunisia and the Philippines for Galey.
The industry now needs to prepare for its next challenge — taking advantage of the trade benefits provided by NAFTA and the U.S.’s recent granting of trade parity to the nations of the Caribbean Basin to prepare for the anticipated onslaught of import competition in 2005, Norwood said.
“We have right now a North American trading block and it’s working very well,” she said, noting that casual bottomsmaker Tropical Sportswear Inc. recently reported that it has cut its average production cycle to 30 days. “The reason they can do that,” she continued, “is that 85 percent of their production is in North America.”
However, CBI trade parity hasn’t produced an immediate surge in demand for U.S. fabrics. One reason for that, contended O’Rourke, is that the cut-and-sew plants in the region don’t have the financial wherewithal to buy fabric, which means they’re not able to offer the full-package sourcing approach that’s become popular with retailers and branded apparel marketers.
“We don’t have the factoring structure set up to support Central America,” she said. “The cut-and-sew plants in the region have an opportunity to do full package, but in order for them to do that, they have to finance through the local banks, and they are looking at interest rates that are out of sight.”
It would seem logical for U.S. mills to step in and help out on the financial front, since it would make it easier for them to sell fabric in the CBI region, she said, but many mills can’t.
“Cash flow is crippling the industry,” O’Rourke continued. “Here they have this opportunity to do things in Central America that require a hefty cash situation in order to help finance the piece goods down there, and many of the mills aren’t in a position to do so.”
While financial institutions are proving a barrier to developing a full-package apparel industry in the Caribbean, more fundamental difficulties are facing those mills that are trying to develop their own apparel businesses.
Galey & Lord was the leader among U.S. textile mills in the full-package experiment: In 1996, it started producing pants and shorts in its own Mexican garment plants. The company has had problems delivering consistent profits from this operation — in announcing financial results for the quarter ended Dec. 31, chairman and ceo Arthur C. Wiener said the garment operation had been “cash positive” for those three months.
However, he warned that he expected that operation’s results to slip again, as it phases in some new styles.
Burlington’s efforts on the garment front have been somewhat more troubled. The company in 2000 shuttered its year-old tailored-apparel facility, though it is pressing forward in jeans making.
Other companies have been reluctant to try their hands at garment manufacturing, partly due to the complexity and partly due to taboo. In the early years of the experiment, many mill executives feared a mill with a sewing plant would be seen as attempting to muscle in on its customers’ businesses.
Even now, many fabric executives remain reluctant to discuss full-package ventures openly.
Observers are divided as to whether full-package production will prove a viable strategy.
“I’m just not convinced that integrating forward into garments is the way to go,” said Wachovia’s Norwood. “Galey & Lord certainly has seen improvement in its latest quarter, but it’s been a struggle. It really had to learn a lot about how things were done. If it were me, I’d rather partner up with someone like Tropical, which knows how to make garments and do the logistics.”
O’Rourke, the consultant, wasn’t ready to write off the full-package experiment just yet.
“It’s getting out of the gate very, very slowly,” she acknowledged. “But from what I can see, you still have a tremendous desire among the branded apparel companies and the retail private label people to develop more full-package business.”
Even while mills continue to invest in garment plants and try to develop the expertise to run them profitably, a few industry voices are arguing that textile mills should go in the opposite direction. Rather than building up their manufacturing assets, these people suggest, U.S. textile companies should start outsourcing production to lower-cost countries, and instead focus on design and marketing.
“What may be dying is the template or the structure of the U.S. textile industry as we have known it over the last 50 to 100 years,” suggested Nicholas Hahn, the Stamford, Conn.-based textile consultant. “Like so many other industries, I think it’s going through an enormous change. There’s no question that what we’re seeing is the industry moving from a production-driven industry to more of a product development-, technical service- and marketing-driven industry.”
Many branded apparel companies that once saw themselves primarily as manufacturers have since outsourced most of their production, Hahn noted.
“That concept is now coming to textiles. Rather than a weaving mill producing its own yarn, it is outsourcing its yarn. In some cases, it’s outsourcing gray goods as well,” he said. “That all sounds very easy, but it isn’t that easy. It will take time for those companies to get used to developing relationships with vendors and suppliers around the world.”
One believer in that model is Neal Grover, president of The Forstmann Co., the woolen mill.
“The old textile industry has died, but there is a new textile industry,” he contended. “The people who will be successful are the people who can adapt.”
Grover has reason to believe in life after death. Forstmann took two trips through bankruptcy in the late Nineties before being acquired by Canada’s Victor Woolens, which gave Grover the helm.
“We’re a marketing company that happens to have a manufacturing arm,” Grover said. “That doesn’t mean that we can’t market fabrics that aren’t made within our own walls. We can’t be confined like that.”
Grover said that Forstmann’s primary focus must be on customer service, and if that means selling fabrics that it doesn’t make, then so be it.
“If someone can do some or all of the production better than we can, then let them do it,” he said.
Other mill executives were wary of the outsourcing model.
“That’s a major dynamic issue for most American textile mills,” said Dan River’s Martin. “They have very significant merchandising, marketing and design capabilities. But they also have significant investment in assets that exist here and they need to run them. To outsource by making the product in Asia, what do you do with the facilities that you have? The first focus for many American mills is take care of your own shops first.”
He said he’d be reluctant to start selling other mills’ fabrics.
“I don’t think a lot of customers need us to do that,” he said. “Most have in-house design and merchandising and marketing and they go directly to a lot of these mills in Asia themselves.”
Despite the concerns, Hahn said he believes that the outsourcing model makes sense.
“It’s the fundamental economics of the situation,” he said. “If we are going to have a viable textile and apparel and home products industry, we are simply going to have to change the way we are working. It’s either that or get out of the business.”