Financo takes look at 'sick' industry
Brent Felgner -- Furniture Today, May 10, 2004
New York — Seen in its totality, the risk profile for U.S. home textiles suppliers seems overwhelming.
"I can't think of a sicker industry — I hate to say it," offered Marvin Traub, chairman of Financo Global Consulting, an arm of private investment bank Financo.
The central realities confronted by U.S. suppliers will pull down most companies that hold on to their domestic production, according to senior executives at private investment banks specializing in retail, and a broad variety of consumer products companies.
At the same time, those that develop or license strong brands will hold the greatest opportunities for survival and, perhaps, profitability.
That message isn't just for the major mills and major suppliers, three of which have entered bankruptcy in the past nine months.
"If you don't have a brand, you're gone," predicted Gilbert Harrison, chairman of Financo.
"If they are a contract manufacturer, they will disappear," he later added, "If they have a brand, they will survive either by partnering up with a Chinese firm, selling to an American firm who's going to produce mostly in Asia, or remaining independent, which is the more difficult thing to do."
Harrison, Traub (the former chairman of Bloomingdale's) and Mary Ann Domuracki (who heads up Financo's Special Situations business, its restructuring arm) were generally bullish on the retail business in home, and straightforward when it came to assessing domestic suppliers' futures.
"Anybody who owns a plant in this country is at the highest risk," Domuracki offered during an interview with HTT at the company's offices here. "A lot (of suppliers) are starting to see pressures from their retail customers right now. And if not from their customer end, then their banks are getting so cautious and concerned that they're getting pressure from the financial side as well."
Far from closing up shop and going home, the U.S. industry will remain "vibrant," Harrison said. Surviving companies will retain their marketing, sales, design and distribution within the United States, albeit with a different manufacturing base and economic model.
"I think a Li & Fung is in a very strong position to be an aquisitor. I think a WestPoint, or something like that, will survive and get new management. I think Springs Industries has to wake up and become a little more competitive," he said. (Financo has a client relationship with Li & Fung.)
The consolidation will surely continue, Harrison said, which brings the downside that product innovation and creativity may suffer, as suppliers become larger and more conservative. Pricing, too, presents a double-edged sword, since the larger companies have strong financial leverage, the downside is that might also bring some arrogance to the pricing process, he suggested.
"I can think back to the era of Dave Tracy (former president of Fieldcrest and another Financo consultant) bringing in the Missoni's, and Martex bringing in a lot of unique brands, and the development of Ralph Lauren," Traub added. "You had a very exciting period in the home textiles industry. You had a lot of people competing and a whole lot of innovation."
Pressures to source offshore and on pricing have resulted in far less excitement and innovation, he said. But he also held out hope that the movement to China may ultimately result in a return to some of that creativity.
He cited the experience of the furniture industry, which has gone from rudimentary constructions years ago to considerably more ornate Italian and French styles today.
"I look at the companies and try to divide them into those that have a quality brand that they own and those that don't," Domuracki explained. "Those that do, have something that's very marketable for the long term. Those that don't, are price-driven for the most part. They have a much higher risk profile."
Moreover, brands translate internationally, providing a further opportunity for cross-fertilization in the form of overseas marketing, adding further viability to companies that own them, she said.
In situations where retailers demand exclusivity, Harrison suggested a "diffusion line," essentially self knock-offs — exclusive line extensions that play off the core label. He cited a department store label that's been translated into a group of mid-tier retailers, each with its own label.
"They're giving each of these stores the exclusivity of product," Harrison explained. "It's a very clever approach. The only problem with that is you still have to develop yourself a national brand (and economically support the offshoots)."
"It's something that they haven't come to grips with and that, very honestly, affects the value of the company," he continued. "On the one hand, it's a very creative approach to give these different retailers what they want. On the other hand, it's a difficult approach because you're not building up brand value."
Those without a branded position will most likely be condemned to living on pricing alone, a profit-challenged life with limited opportunities for further investment, the group said.
What kind of property has the best prospects to attract capital?
"It has to be a cash register that's already ringing that needs financing to take it to the next stage," Harrison said.
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