Apparel Industry in America - A not such a pretty target for Vietnam at the start of the BTA

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Copyright © 1998-2008 Vietnam Venture Group, Inc. All rights reserved. January 12, 2002

Slowdown Rips Holes in the Apparel Industry
Leslie Kaufman New York Times Service
Monday, January 7, 2002
http://www.iht.com/articles/43938.html

As Prices Fall, U.S. Makers Risk Failure

NEW YORK The dawn of 2002 brought no happy new year to clothing makers. For them, the squeeze is on.

The recession, economic reverberations from Sept. 11 and unseasonably warm weather in late autumn combined to clobber apparel sales. With sweaters and winter coats piling up at the pinnacle of the shopping season, desperate retailers dropped prices by as much as 70 percent.

The pain of the sharp markdowns will be felt all the way down the retail food chain, but the brunt will be borne by the apparel manufacturers and wholesalers that supply stores with everything from designer denim to cashmere overcoats. The ranks of these businesses are expected to shrink sharply in the coming months, according to bankers, other creditors and many manufacturers themselves.

Big names such as Donna Karan, Tommy Hilfiger and Ralph Lauren are all expected to suffer. But the real trouble will be felt by the thousands of midsize and small companies, those with sales of less than $100 million - companies like Bisou Bisou, maker of a trendy women's line. Many, like Bisou Bisou, which is on the verge of filing for bankruptcy for its retail operations, could seek court protection, following in the recent footsteps of many textile manufacturers, including Burlington Industries Inc. and Malden Mills Industries Inc.

"The domestic fabric suppliers are all already almost out of business," said Adam Winters, a senior vice president at Merchant Factors Corp., one of the industry's largest suppliers of credit, "and now the apparel manufacturers must consolidate or go out of business."

Low-cost competition from overseas has been driving apparel manufacturing offshore, and retailers have been extracting steep concessions from their suppliers for years - especially since the late 1980s, when bankruptcies and consolidations among retailers left fewer but more powerful chains. Department stores in particular have been using this strength to elicit concessions like "markdown money" - the payments that retailers demand from manufacturers to make up for whatever profit they gave up by putting goods on sale after the appropriate selling season ends.

But apparel sales were soft all 2001, and so were prices. As the economy weakened, credit tightened, leaving many manufacturers and wholesalers in a vise.

"There is very little margin for error in this environment," said Paul Charron, chief executive of Liz Claiborne Inc., one of the few companies whose third-quarter sales and profit improved from last year. "Large, sophisticated retailers are looking to do business with large, sophisticated suppliers. Management that has not executed with precision is in big trouble."

The exact damage to the sector will not be known for a few weeks - it is in January that retailers sit down with suppliers and demand cash back for those goods sold at discount prices or delivered late or in imperfect condition. But the omens began to emerge in late October and November, when the largest makers reported discouraging third-quarter results and hinted that there was far more bad news to come.

VF Corp., the maker of Lee and Wrangler jeans and Vanity Fair lingerie, is laying off 13,000 employees, or 18 percent of its work force. For the quarter ended in September, Donna Karan International, owned by the French luxury conglomerate LVMH Moet Hennesy Louis Vuitton SA, had a net loss of $53.7 million, against a profit of $14 million a year earlier.

The middle tier - companies with $5 million to $100 million in annual sales - is feeling more pain. One such company, BCBG Max Azria, based in Los Angeles, is short on cash and has been slow to pay its own suppliers; the company is now instituting 10 percent to 15 percent across-the-board cuts in expenses.

Mad Engine, a San Diego company that sells T-shirts embellished with designs and sequins to department stores and to larger manufacturers like Levi and Polo Ralph Lauren, has laid off 50 percent of its headquarters staff.

Michael Kors, a designer whose company is partly owned by LVMH, was on the verge of a multistore rollout of his midprice line with Bloomingdale's when the deal collapsed, he said, after he refused to guarantee profit margins. Bloomingdale's, a unit of Federated Department Stores Inc., denied that it had asked Mr. Kors to guarantee margins.

Because most domestic apparel makers are middle-tier private businesses, often family affairs, they lack the resources and muscle to fight back when retailers knock them about.

Princess Knitwear Inc., for example, a small company based in the Bronx that still has manufacturing operations in New York City, has survived by producing only high-end goods to order. In the autumn, Princess took on a sizable order from an upscale department store chain that George Wolf, the owner, declined to identify. For four years, it had been a good client, paying in full and on time, he said, but two weeks before the order was due to be delivered in October, he received a call from the store's buyer, saying that if he did not cut the price by 33 percent, the store would cancel the order.

Mr. Wolf said he protested that such a cut would wipe out its profit margin. The buyer apologized, Mr. Wolf recalled, but insisted that extraordinary times called for extraordinary measures. With no choice but to discount or let the made-to-order knitwear sit in his warehouse, Mr. Wolf swallowed the costs.

"We should all be in this together," he said. "Instead, department stores want to maintain their profit margin and have us shoulder the whole sacrifice."

As retailers become more demanding, creditors - usually factoring companies, the financial middlemen that finance manufacturers and collect payment directly from retailers - have become less forgiving, too, especially in dealing with family-owned makers.

"The factors are becoming extremely tight," said Marc Bohbot, chief executive of Bisou Bisou. "They are looking over the shoulder of every management, and they want 10 times the guarantees of last year to loan money. They investigate any asset outside the corporation in order to get liens on buildings, homes and even cars to guarantee the loans."

Macroeconomic conditions, meanwhile, are worsening. Prices paid to producers of apparel have been falling since 1999; since November alone, the index of those prices is off almost 1 percent, according to the Labor Department.

"The success of discount retailers like Wal-Mart, Kohl's and Target has helped drive prices down," said Carl Steidtmann, chief economist at Deloitte Research. "It means if you are a midlevel manufacturer, life is not very fun."

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