Select your customer.

Provide the products your customer wants;

in an environment and at a price your customer considers reasonable.

GAP: THE GOOD TIMES:

At the close of the 20^th century Gap was not only the world’s largest and most successful garment retailer, GAP set the standard which all others aspired to meet.

Gap was structured for success.

Gap understood its customer and was totally dedicated to catering to that customers needs:  The GAP customer had little interest in fashion and less interest in fad; but wanted a well designed, well made garment, sold in a clean, clear and well managed store.

Gap surpassed their customers needs.

As the Gap customers grew up, Gap grew-up with its customers.

As the customers became more affluent, Gap created Banana Republic to provide a more up-market product, while still maintaining the Gap no-fashion persona

As their customers married and started families, Baby GAP and GAP Kids were right up there with them, catering to what eventually would have become the next generation of loyal GAP customers

15 years ago, I was a GAP customer.  Twice a year, I would buy clothing for my children.

As a father I appreciated both the in-store service and the product merchandising where tops and bottoms fit together perfectly as sets.

As a garment professional, I was impressed that a company the size of GAP was able to maintain the highest standard of make, using the best material available.  T-shirt with virtually no shrinkage; Color fast with perfect color match.

GAP THE BAD TIMES

Today, 12 years later, GAP is structured for failure.  From January 2005 to March 2012, Same store sales increased in 22 months but declined in 65 months.

The quality of the product has deteriorated;

The quality of design has deteriorated;

The merchandising has deteriorated;

But, most importantly, GAP no longer has a definable customer.

In short GAP does not know who they are selling, what they are selling or why anybody would buy their product in the first place.

Some time during the next decade, someone, someway  will try to determine just what happened at GAP.  That might be The Harvard Business School — the case study, because it is a salutary lesson for everyone in the industry. It might also be the HBO—the miniseries, because the GAP story is one filled with drama and more than its share of heroes and villains.

THE PROBLEM WITH GAP

The Gap structure and system was the creation of one man:  Mickey Drexler who ran the company from 1983 until he was fired in 2002.  Drexler might well be the finest merchant of his generation, very much in the school of Stanley Marcus and Simon Marks.

The great garment industry merchants all have two talents:

1. The merchant’s eye — the intuitive ability to know precisely if a particular style is saleable to their customer
2. The commitment to design integrity — The ability to provide that specific product to their customer.

All three — Marks, Marcus and Drexler — had the eye, and all three were able to provide the product.

Each had a commitment to design integrity, but met different challenges.  Simon Marks developed a small network of independent British factories  committed to producing to M&S’ strict standards.  Stanley Marcus worked with a limited number of established brand suppliers both in the U.S. and Europe, all competent to meet Neiman Marcus’ requirements.

However, because of GAP’S size and the shift to low cost gament exporting countries Drexler did not have the advantages available to Marks and Marcus.  Drexler was forced to deal with literally thousands of suppliers, located all over the world, few of whom having the existing abilities to meet Drexler’s standards.

To overcome these problems Drexler created a unique structure and system at Gap, solely to design the garments that Drexler wanted for his customers, and to ensure those product were made precisely the way Drexlers wanted those products made.  In the end, the entire Gap organization and system existed to provide the clothing Drexler personally  wanted, produced the way Drexler wanted.

It is a truism, that in business no person is indispensable.  It is certainly true that GAP could have continued to grow and prosper without Drexler.  However, it is equally true that Gap-Drexler structure and system could not function without Drexler.

There is a strange irony here.  When Fisher fired Drexler, he brought in Paul Pressler as CEO.  When Fisher finally recognized that Pressler was the “wrong person at the wrong time”, he too was replaced, this time by Glenn Murphy.  Both Pressler and Murphy are first class managers. However, neither had any prior garment product knowledge. As a result, neither understood that the Gap structure and system they inherited, existed solely to meet the requirements of someone no longer at Gap.

The company that Drexler built and the structure and system he created worked well to design and create only within the narrow confines of  what Drexler wanted for his customers.  To the degree the company changes direction the structure and system fails.  For example, since Drexler had zero interest  in edgy, fashionable or trendy design, lead times were relatively unimportant.   For no-fashion fashion, it makes little difference whether the time required from first design to in-store delivery is 48 days or 48 weeks.  However, any attempt to introduce the “new’ trend or the “new” item in a 48 week cycle invariably led to costly disasters.

Today, If you want to see the best Gap in operation, visit J. Crew where the Drexler structure and system operate smoothly and profitably, because Drexler is there running the show.

The problem at Gap is not that Don Fisher fired Mickey Drexler.  The problem is that Fisher never understood why he hired Drexler in the first place.

Herein lies the true problem.  In the 10 years since Fisher fired Drexler, Gap has been going consistently down hill.

We have unwritten rules in our industry.

If the company has two back-to-back bad collections, fire the designer.

After two failed designers, fire the merchandiser.

After two failed merchandisers. . .

With each failure the chopping block moves a step-up.

The chopping block must eventually reach the very top.

In the final analysis, the problem with Gap is a war of egos.

Although I have never met him, I am sure that Mickey Drexler has an enormous ego.  And, I do believe that in business, as in life ego is very destructive.  However, ego and genius often go together, and if we want genius we have to take the box it comes in.

If you want the Theory of Relativity, you must accept that its creator was a lousy husband. When Sixtus wanted his ceiling painted, he did not question the artist’s sexual proclivities;  nor when Borgia wanted his apartments decorated, was he concerned that the friar hired to paint the walls used the friar’s own mistress as a model of the Holy Mother.

I certainly do not want to compare Mickey Drexler with Albert Einstein, Michaelangelo, or Fra Lippo Lippi.  I would however point out, that genius occurs in almost every field of endeavor, and it is invariably with ego.  If  we want the genius  we must put up with ego.

The same cannot be said when ego exists with neither real talent not genius.  It is that point where ego is destructive.

The problem with Gap is senior management, who has spent the past decade in an effort to prove that Gap will prosper without Mickey Drexler and will more than likely continue to do so until either the company is sold to be broken-up or simply folds.

The garment industry is different because the garment industry is all about product.

To understand the problem we must recognize that the garment industry consists of literally thousands of separate products each fundamentally different than the other and each subject to individual changing customer demand.

To the economist the garment industry has but a single product — garments —which includes different models each differentiated only by design and price. To the economist, there is no difference between the garment industry and the automobile industry where trucks, cars and SUVs are simply different models of a single automobile product. The economist certainly accepts that there are manifest differences between a Ford Fiesta and a Rolls Royce Phantom. For example, the Fiesta costs $15,000 while the Phantom costs $450,000.  The Fiesta is produced in hours using robotic equipment, while the Phantom requires months using highly skilled craftsman.   The Phantom is much larger and much more comfortable than the Fiesta.  The Fiesta has no built-in champagne storage rack

However, to the economist these are not fundamental differences but rather differences in degree.

Ø    They both use the same materials.  Steel, aluminum, carbon fiber, microprocessors, etc.

Ø    The manufacturing process is virtually the same. Build the chassis, construct the engine and the body and assemble the lot.

Ø    The Phantom may indeed cost 30 times more than the fiesta, but that too is only a difference in degree.

The difficulty is that the single-product concept that works so well in the automobile industry, falls apart in when applied to garments.

Consider an item:  knitted pullover tops. This item includes garments as far apart as  a Haynes cotton t-shirt and an Armani cashmere sweater.  Unlike the Phantom/Fiesta comparison, the differences between the cotton T-shirt and cashmere sweater go well beyond degree.  They are fundamental.

Ø    They are constructed of very different materials.  The Haynes T-shirt is made of cotton. The Armani sweater is made of cashmere.

Ø    The process is entirely different.  The T-shirt is cut from fabric which is then sewn to produce the garment. The Sweater uses no fabric whatsoever. It is knit directly to the shape of the garment pieces which are then linked together.

Ø    The Haynes cotton T-shirt is available at WalMart for $5.50, the Armani cashmere sweater is available at Giorgio Armani for $2875 — 553 times the cost of the Haynes T-shirt.

In the automobile industry, if SUVs are not selling well you can convert the SUV factory to produce trucks or cars.  In the garment industry, if sweaters are not selling well, you close the factory. There can be no conversion to T-shirts because, other than the raw space, none of the existing plant and machinery can be used to produce any product other than sweaters.

The key to understand China’s falling market share is in the product.  The economist assumes that rising macro-economic costs have driven the customer elsewhere. However, when we factor in the products, we can see that the main problem facing China is not the customer that ran to another supplier, but rather the customer that disappeared altogether.

For example, China has always been the world’s largest producer of silk garments as well as garments made from what we call “other vegetable fibers”  (OVF) including linen, ramie, jute etc.

Between 2007 and 2011, U.S. imports of silk garments declined by -40.6% while at the same time OVF garment imports declined by -42.9%.  As a direct result China’s exports of these two groups declined by -$1.3 billion. Add to that the additional loss of $510 million resulting from declining demand in 39 other products we have a cumulative loss $1.8 billion. Had U.S. demand for these products continued unchanged, China’s 2011 recorded market share of 37.8% would have risen to 40.2%, an all time record.

The decline in demand for Silk and OVF garments also goes a long way to explain China’s reduction of average FOB prices compared to its competitors.  In 2011 FOB prices rose world-wide.  However, prices for made-in-China garments showed a lower rate of increase.  As of December 2011 FOB prices were at a discount of -9.7% to world average compared with a discount of -4.5% for the same period in 2010.  Most professionals assume that, China’s ability to maintain lower prices was due to export subsidies, currency manipulation, etc.  While these are doubtless important factors they are secondary to the changes in  product  mix.

Going back to the silk and OVF example we can see that the reduction of exports for these products would have a serious effect on China’s average price, since price of a silk garment was 4 times and an OVF garment 1.6 times, China’s average FOB price

Changing product mix has affected China’s exports in another more fundamental way.  Four basic commodity products — cotton t-shirt, cotton casual trousers, cotton woven shirts, underwear — account for 40%-45% of total U.S. garment import.  Typically, when a country enters the global industry they concentrate their production in one or more of these products.  As their industry develops, they diversify into more difficult higher value added products.

China has always been the exception.  In the past its product mix was always diversified.  Twenty years ago China’s top 5 export products were OVF sweaters, silk blouses, silk shirts, synthetic dresses and sports vests. During the same period the big-4 products accounted for 14.7% of total garment exports.  Ten years ago, China’s top 5 export products were babywear, silk knit blouses, silk woven blouses, OVF sweaters and synthetic dresses.  During the same period, the big-4 products decreased to 12.6% of total garment exports  China was always the consummate niche supplier because it dominated all the niches, leaving the rest of the world to fight over the big-4 commodity products.

The past five years has brought a singular change to China’s product mix.

The importance of the big-4 products has little changed over the past twenty years. As of 2011they still accounted for 40%-45% of total garment imports. On the other hand, with the exception of Bangladesh, the industries in most exporting countries have become more diversified.

In this regard, China is big exception Ten years ago the big-4 products accounted for 12.6% of China’s garment exports.  Five years ago that figure rose to 18.9%; and in 2011 to 28.9%.  Between 2007 and 2011 China’s reliance on the big 4 basic commodity styles increased by over 53%.

It is this move away from its previously successful strategy of diversity that is the root cause of the decline of China’s garment export industry. While it is undeniably true as we have seen above in the case of silk and OVF, much of this change is due to factors beyond its control, the move from  high quality niche to basic commodity mainstream is based on the decisions of factory management.

It would appear that the average price of made-in-China garments is falling relative to its competitors not because Chinese factories are charging less for their products but rather because Chinese factories are making cheaper commodity products

THE UNDERLYING CAUSE

This leaves us with a true enigma. Why should a sophisticated profitable industry choose to move away from fashion goods towards cheap relatively unprofitable commodity garments?

One possible answer lies in the nature of China’s garment industry.

In fact, China is home to two separate garment industries.

The first include the  Chinese state owned enterprises (SOE) which produce low cost commodity garments while the second consists of mostly foreign owned transnational factories which account for most of the higher quality fashion goods.

In the past both SOEs and transnational factories produced of  silk and OVF garments with the SOE’s concentrating on commodities while the transnationals made the higher quality fashion goods. When demand for these prodcuts fell, the SOEs returned to producing the big-4 commodity products, while the transnationals returned to producing the higher quality fashion goods.

When costs began to rise, the transnationals began shifting production to their branch factories located outside of China. The SOEs, however, having few if any overseas factories, continue to produce the same cheap commodity goods.

China’s garment export industry faced a double loss.  Changing fashion caused some of China’s customers to disappear, while changing costs have caused some of China’s factories to go off-shore

CHINA’S CHALLENGE

To the degree this analysis is correct, China faces a serious long term problem.  As China’s economy develops, costs invariably rise making labor-intensive production unprofitable. In this sense China is now facing the problem common to all industrialized countries, including the United States, Western Europe and Japan.

In every instance production moved off-shore hollowing-out the industry.

As outsiders, our mistake was to assume that China was unique in that their export Juggernaut would be an ever increasing force, destroying everything in its path, unstoppable until China controlled the world economy.

We have forgotten that many countries, each in its own time has been in the same dominant position.  There is nothing unusual about China’s current place in the global economy  or the challenges China fasces.

Clearly China must undergo serious structural and systemic change, if they maintain the levels of growth necessary to satisfy their people.  In this regard past successes may yet prove to be obstacles to making  the necessary changes.

1.    Without the support of the textile industry, the U.S.  Congress  will reject any proposed garment free trade agreement.

As a result all negotiations between the U.S. and garment exporting countries have been based on a never ending series of compromises in an effort to achieve some consensus with the U.S. textile industry

Through these compromises, we have reached the point where most of the clauses of the free-trade agreement exist to limit free-trade:

Here are but a few.

To qualify for duty-free access the garment must be produced in the free-trade area, from fabric woven (or knitted) in the free-trade are, which in turn was produced from yarn spun in the free trade area — the yarn forward rule.

To qualify for duty-free access, the garment must be produced using U.S. made thread.

To qualify for duty-free access, the garment must be produced using U.S. made  pocket lining.

2.    The benefit of Free-trade agreements is that they increase  trade liberalization which directly benefits the United states

The assumption is that more liberal trade leads directly to reduced retail garment prices saving money for consumers while reducing inflation.

Here comes the good news:  The Trans Pacific Partnership has brought us to the end of the line,  where these assumptions no longer make any sense.

1.    Compromise to build consensus with the U.S. textile industry is out window:  TPP includes Vietnam, the U.S.’ second largest supplier of garment imports, after China.  No one believes that the U.S. textile industry will support a trade agreement granting duty free access to made-in-Vietnam garments.

2.    Regional free trade agreements as a source of trade liberalization leading to lower prices is flushed down the toilet:  Imports account for 97% of all garments sold in the U.S.  As a result regional free-trade agreements are now 0-sum, where exporters in the free-trade zone take market share from exporters outside the zone which has no effect on FOB prices or inflation.

Once we accept that the textile industry will not support TPP under any circumstances, and that TPP has nothing to do with trade liberalization, we are finally free to look at the challenges facing the TPP negotiations, rationally.

Here is something worth considering.  Free trade agreements exist to bring benefit to the insiders, at the expense of the outsiders.  The problem is that the traditional negotiating strategy on both sides — TPP PLAN A ­— will benefit every member, with the exception of the U.S.

It is for this reason that the U.S. Congress has 0 interest in supporting duty free access for TPP garments.  Why should they support an agreement where the  big  winner will be Vietnam while the U.S. is the big loser.

The TPP negotiators on both sides must come to terms with the new reality.  They must recognize arguing about the yarn forward rule versus the fabric forward rule is as irrational as standing on the deck of the sinking Titanic, watching your fellow passengers fighting to get on the life-boats and feeling happy because if they leave, you stand a better chance to win tomorrow’s shuffle-board tournament.

TPP provides the perfect opportunity for change, because of the nine original members, eight[1]  have enough in common to benefit from the same free-trade agreement, and the greatest beneficiary will be the U.S.

For the first time in 20 years we are in a position to create a new strategy which will change forever the way the U.S. Government views garment free-trade agreements.

I have spent a lifetime creating and implementing garment industry strategies for companies, governments and regions.  I am certain that working together, we can create a new workable strategy for TPP which can be replicated for virtually all future garment free-trade initiatives.

Our industry has more than its fair share of original creative and innovative minds. The time has come to work together to create a new Plan B, which will benefit everyone;  which would allow the USTR representative to  return to the administration and say,  here is a free trade agreement agreeable to all TPP members that will provide real quantifiable benefit to the U.S. economy, and bring Republicans and Democrats — liberals and conservatives — to a consensus, at little or no cost to us.

 Why argue to achieve failure, when we can all agree to achieve success?

Increasing labor, material and overhead costs in the major garment producing countries inevitably led to rising prices. Eventually FOB prices rose to levels unseen since the bad old days of quota restrictions. The era of continual  FOB price reductions had come to an end.

Both retailers and their suppliers were caught in a bind.  The economies of major garment importing countries were in a fragile state. Costs were rising, beyond the control of the suppliers, but retailers were unable to pass these costs on to the consumer.

Old customer/supplier relationships broke down as retailers and brand importers began to search for new low cost suppliers.  Supplying countries which previously had been of secondary importance, such as Nicaragua and Sri Lanka, suddenly became suppliers of choice.  Others which had previously been written off as failed suppliers, such as Mexico and the Philippines, were reborn.

The big loser was China; although the term “loser” may not be an apt description for a country with a 39% market share.  Customers saw China’s rising costs and more importantly rising value of its currency and chose to move elsewhere.

We can see the pattern in the chart below.  China’s market share increases peaked in the 1^st quarter of 2010.  Thereafter increases moderated until 1^st quarter 2011, when market share change turned negative, until reaching a trough in May/June 2011.  At that point the trend reversed once again, moderating the declines.

January 2012 continued the improving trend, as unit market share once again rose, while value market share declines moderated to -1.0%

Here comes the big question:  Does this new twist mark the return to China’s ever increasing market share?

On the yes side, it is now quite clear that China’s rising costs notwithstanding, the FOB prices of made-in-China garments remained quite competitive throughout this period.  As we can see from the next chart, China’s FOB prices rose consistently in 2011, compared with 2010 and these continued in January 2012.

However, FOB prices from almost all suppliers showed greater increases, with the result that throughout this period China’s FOB prices were at a discount to the average from all suppliers.  By January 2012 that discount had had reached -8.1% a substantial improvement from the same period in 2011 which stood at a discount of -3.8%.

On the no side, we have two factors.  First of all, as costs rise, there is a limit to any supplier’s ability to keep prices unchanged.  With China’s factories already operating at margins below 2%, they may not be able to absorb any further cost increases.  This is particularly true of labor costs, where China’s garment factories must compete with high tech factories which are able to convince customers to pay more to cover these wage increases.

The second factor is structural.  The value of the Chinese currency (RMB) relative to the U.S. dollar (and the Yen and Euro) single most important factor affecting FOB prices.

In the short term the Chinese Government has able to control the value of their currency.  Between June 2010 and end January 2012, the RMB increased by about 8% against the dollar.  Thereafter the value of the RMB was allowed to move only within a very narrow band — 7.7%-8.3%.

In the long term, despite their greatest efforts and most stringent controls, the Chinese the price their government must pay to control the value of their currency may be unacceptably high.

In early 2012, the Chinese government stopped revaluation because the rising value of the RMB resulted in rising costs and therefore reduced demand for exports. This proved to be unacceptable for two reasons:   Falling product exports would lead to both reduced economic growth and higher unemployment, At the same time would bring complaint from the exporters themselves who are a large and powerful interest group.  The real possibility of falling growth rates, rising unemployment together with the anger of serious and powerful commercial interests was too much for China’s leaders to accept.

At the same time limiting the rising value of the RMB result in equally serious and equally unacceptable difficulties.  In the Chinese system an undervalued currency leads directly to rising inflation.  These rising prices have an immediate negative effect  on the living standard of the majority of Chinese people.  The real possibility of a falling standard of living which may lead to popular unrest is too much for  China’s leaders to accept.

In the final analysis, the Chinese government must choose between increased exports which lead to rising inflation or decreased exports which lead to reduced economic growth and rising unemployment.  Despite their most earnest efforts, the Chinese government  cannot have both without fundamentally changing their economic system.

This is the real problem facing the Chinese government and the real uncertainty facing garment importers. Until this problem is resolved, garment importers must accept that dealing with China has real and serious risks.

The difficulty is that customers’ needs do not remain static.  We live in a dynamic universe where over time the world changes and our customers change.  We are the fashion industry and in our industry either you are in the forefront of change or you are on your way out.   

The rules may be the same for everybody, but the challenges facing factories and mills are different than those facing their customers. More importantly the reasons why retailers and brand importers fail to effect change are very different from the obstacles facing their suppliers — garment factories and textile mills.

 The greatest obstacles facing the customers are psychological:  Some companies are unable to adapt to change because their organizational structures have become paralyzed, unable to move forward.  Other companies fail because senior management has become controlled by their egos and are therefore convinced they need not change.

The suppliers — garment factories and textile mills — are different. The greatest obstacle facing them is cultural. 

To understand a psychological problem, you have to move into the minds of people. To understand cultural problems, you have to move into their souls.

The global garment export industry is predominantly Asian.  These factories and their owners whether Indian, Chinese or Indonesian, hold some defining traits in common.

•  They are family businesses.

• They developed from very small companies with very little capital.

• Their owners succeeded through total commitment; working 24 hour days, often sleeping in the factory;  gambling their entire capital over and over again that the company would overcome the great challenges they faced every day.

• To these people, the factory is almost as important as family.  Most live in corrupt societies where the factory is the difference between a dignified life and life as a total victim.

• Their workers, technicians and managers must be 100% committed, not to the company but to the owner.  Decisions are made at all levels based on the understanding that this is what the owner would do when faced the same problem.

To complicate matters, most of these companies are currently undergoing the process of transition from the founder generation to the second generation.

It is these cultural factors that determine how companies react to change.

Suppliers recognize change, only when sales begin to drop.

Their first reaction is to find an answer to the problem.  However, to be successful, the problem must be external to the company, because the primary goal is to maintain the integrity of the culture, structure, and system as formulated by the founder and which has been so successful for the past decades.  To put it another way, if the problem is internal any answer must by definition presuppose that the current culture, structure and system as created by the founder, is wrong.

 a.    Sales are falling because the industry is in a state of recession

This is the perfect answer because the problem will eventually solve itself and therefore, management need not do anything.

 b.   Sales are falling because customers are no longer working with our country

This is a very good answer if you are located in Thailand, Jordan or Dominican Republic.  The bad news is that there is no solution.  The good news is that the company’s culture structure and system remains unchallenged.

  c.    Sales are falling because we are not taking a more proactive role in marketing.

This is everyone’s favorite, because unlike a where there is no problem and b where there is no solution, c shows that management recognizes a problem and is working towards a solution while still maintaining the founder’s integrity.

It is only after management goes through a, b and c  and fails, that some companies recognize that the problem are internal:  Our customers are buying, but not from us.

To put is another way:  They are not buying what we are selling.

Those few who reach this point are able to begin to look at the problem. 

• Things have changed.
•  We must understand the change.
•  We must adapt, even if that means changing how we operate.

We live in the real world where there are many changes and solutions.  The following is but one example

Change

Customer costs are rising.

Customers cannot pass these increasing costs on to the consumer.

Customers must reduce overhead.

Customers will cut costs by reducing the number of suppliers to the bare minimum of Strategic Supplier

If you are not a strategic supplier, you are about to become no-supplier-at all

If you are a supplier in this position, there is nothing you can do (unless you can suddenly raise your annual sales volume from $20million to $200million)

Solution

Find a group of retailers and/or brand importers who have a need for your product and where with some effort you can establish a relationship whereby you become a strategic supplier. 

This does mean creating new core competencies, moving to new markets and most importantly changing the company culture, organization and system.

The terrible truth is that what proved successful for the past forty years has failed in year forty-one. 

Saving the past is nowhere as rewarding as saving the future

Clothing stores open and close, at a mind boggling rate. New fashion labels appear only to disappear almost instantaneously. People filled with hope and great vision spend months and sometimes years to plan the first step in their evolution to become the next H&M, North Face, or Zara. “If they did it, why can’t we?”

Regrettably while it is undeniably true that almost all successful retail groups and global fashion labels were built on modest structures, it is equally true that for every H&M, North Face and Zara, there are hundreds if not thousands of start-ups that fail within the first year of operation.

We should not be surprised to hear that start-ups usually fail.  This is true of most industries.

What makes the garment industry different is the large number of long established, previously profitable companies that go broke.  We have a pattern: We create Innovative companies that rise and prosper only to decay and die.

Our industry, particularly in the United States is built on the dead bones of yesterday’s winners.

Have you ever heard of Rosenthal & Kalman or Samuel Parnes?

What about David Schwartz (Jonathan Logan) or Freddie Pomerantz (Leslie Fay)?

Rosenthal & Kalman and Samuel Parnes were the leading companies in the early 20^th century. These people built the world’s first ready-to-wear women’s fashion garment industry.

David Schwartz (Jonathan Logan) and Freddy Pomerantz (Leslie Fay)  were the  industry leaders from 1947-1970. Both are forgotten[1].

Surely you have heard of Sears and Liz Claiborne.

Sears used to be the world’s largest department store group. For all practical purposes Sears invented the consumer catalog.  More importantly it was the single most trusted retailer in the United States.  Quality was impeccable and prices reasonable. Today Sears is quickly moving towards oblivion.

Liz Claiborne was a remarkable company.  Starting from nothing, in 10 years Liz Claiborne and her husband, Art Ortenberg built the greatest fashion brand of its generation.  Liz Claiborne was the first fashion brand importer to go public on the New York Stock Exchange.  Its management and technicians were perhaps the best in the world.  Their sourcing people included Bob Zane, Gary Ross  the super stars of the era.

There is every likelihood that within the next 10  years both company will be either sold to be broken-up or go out of business.

Why do so many of our leading companies fail?  Why is our industry so different than others?

The short answer is change:

Companies succeed because they provide value to the target customers.  Their core competencies are geared to understanding their customers’ needs and providing for those needs.

However over time,  the world changes and so too  do our customers’ needs.  We are the fashion industry and in our industry either you are in the forefront of change or you are on your way out.   

All of us are aware of the currents changes which will affect the global garment industry

Demographics change:

Our population is aging.  Middle and upper middle class families are having fewer children while those in the lower economic class are having more children.  People who previously moved from city centers to the suburbs are returning the city centers.  Clearly if you operate a chain of designer label children’s wear boutiques located in suburban malls, you might to do well to change your business model.

Technology changes:

We live in the 21^st century internet age, yet our internet strategies differ little from the 19^th  Sear Roebuck catalog.  The new generation of consumers are computer literate, who expect to buy by internet. They will need physical stores at best only to try-on garments.  Selling via internet reduces costs and therefore should reduce prices.  Until and unless retailers recognize they are playing a new game with new rules, they will simply be sending their business to those who are computer savvy.  10 years from now Amazon may have a greater garment retail volume than Wal-Mart.

Customer psychology changes:

Today, our customers govern the market place.  We can no longer tell the customer what to  buy. Our role is to determine what our customers want and provide those products at a price they are willing to pay.  To try to sell the customer something else,  whether through clever advertising or enticing price reductions is more than foolish, it is an expensive way to commit suicide.

All of us recognize the need to change.  Yet many retailers and brand importers cannot adapt, let alone be in the forefront of change

If we can understand why some companies embrace change while others reject change, we can begin to understand why companies which previously had been vibrant, profitable and successful reverse course and move towards total failure.

Garment Company Pathology

A company is legally defined as an artificial person.  It is certainly an organism.  As with any organism, companies are susceptible  to disease. I suggest that previously successful companies fail because they become infected with one or more diseases that are ultimately fatal.

Corporate Sclerosis CS):

This is a disease where middle and senior management are not just unable  to react to change, they will fight against change and even lapse  into a psychotic state where they believe they are operating the 1970s a time when customer bought what we told them to buy; internet did not exist; customer-base grew because the population grew;  and when the brand-importer and retailer was in charge.  The disease is potentially fatal.

Liz Claiborne is a prime example of CS.  The organization of highly qualified innovative professionals is gone;   either replaced by a string of second raters or their work outsourced entirely.  Today the company no longer has any definable core competencies.  Everyone’s single goal has become survival — to hold on to their jobs for another year, or even month.  Here there can be no reaction to change because the company must operate at the level of the competency of its current management.

Pathological Ego (PE). 

This is a pathological state where senior management is right because they are senior management, and where any idea not their own was a bad idea.  Regrettably our industry is genetically prone to PE.  Ours is a difficult industry where those who succeed ultimately believe they are specially blessed.  A person who runs a garment company successfully for 10 years, believes he talks to G-d.  After 15 successful years he thinks that G-d is listening.  After 20 successful years he thinks G-d is talking back.

Sears is an equally prime example of PE.

Successful companies exist to provide value to their customers.  In this sense profit is a measure of value compared with costs.  When customer value exceeds costs you make money.

Sear current controlling management believes that their company exists to make money and that providing customer value is an unnecessary extravagance. They believe that with the proper advertising campaign customers will pay more for less.  Management does not believe that they are the smartest people in the world, but rather that everyone else is stupid.

Neither Liz Claiborne nor Sears will survive unless each undergoes a radical cure.

Regrettably they but two of many. Just look around

There are three interrelated means to reach this goal

Operational; e.g., Reduce costs

Marketing;  e.g.,   Increase sales

Mixed; e.g., Increase margins

The range of possible strategies is to a large degree based on two factors:

a.  What the supplier can bring to the table; i.e., core competency;

b.  What the customer needs; i.e., core competency deficits.

However, these by themselves are insufficient to determine the best (or even a workable) strategy. We are still left with an almost infinite number of possibilities.

At the end of the day, the optimal strategy is based not only on what can be done but equally importantly, what cannot be done.  Every strategic development project begins with client-imposed restrictions each of which limits the number of possible strategies.

Restrictions can be actual, perceived, or self imposed.

For example:

A factory client wishes to increase profits by changing his operation to provide speed-to-market, but has a serious restriction:    

Actual Restriction:  We have a logistics problem. We are located on an island in the middle of  the Indian Ocean.  This is a fact which must be recognized and accepted.

Perceived Restriction: We are located on an island in the middle of  the Indian Ocean and therefore cannot achieve speed to market.  This is not a fact, just a perception.  Logistics is a cost factor.  You can move product from anywhere to anywhere in less than 30 hours, if you are willing to pay for air freight.  If your product is a low value-added basic commodity which cannot carry the cost of airfreight, the restriction becomes actual.  On the other hand if your product is a high value-added fashion item, airfreight becomes viable and the restriction disappears.

In this situation, successful strategies are limited to those involving higher value added products

A factory client wishes to increase profit margins by changing his operation to produce higher value-added fashion products, but has a serious restriction:

Actual Restriction:  Our country faces a nomadic-worker problem. In many countries, typically leave their jobs after six months to work in another factory. This is a fact not a perception.

Perceived Restriction: Our country faces a nomadic-worker problem and therefore we cannot provide them with the advanced training necessary to move to higher value added products. This is not a fact just a perception. True, it is not cost effective to train workers if they will leave immediately training is complete. However, it is equally true that workers will stay with their current employers if the company makes the necessary effort to keep them.  Developing worker loyalty and motivation begins when management changes their attitude; no longer defining their workers as disposable tools and redefining them as capital assets.

Self-imposed restriction: Our country faces a nomadic-worker problem and therefore we cannot provide them with the advanced training necessary to move to higher value added products.  Workers are uneducated and generally stupid. We cannot stop them from leaving.  Investing in worker training will simply provide our  competitors with better workers. If management insists on treating their workers as disposable tools — not caring if the workers leave ­— they should not be surprised when the workers do leave.

In this situation, there are no successful strategies.  The factory cannot move up to higher value added products without worker training and no-worker-training is a self-imposed restriction

As you can see from the example above, not all restrictions are rational.

As a general rule, the less rational the restriction, the harder it is to overcome.

Actual restrictions are the easiest.  Here the client recognizes a problem and is paying the  consultant to overcome that problem.

Perceived restrictions are more complex.  Here the consultant must first convince the client that the restriction is indeed perceived and not factual; e.g., geography in itself does not mandate longer lead times.  Once the client recognizes  that the restriction is perceived — not actual — the consultant can then work to create a viable solution.

Self-imposed restrictions.  Are usually beyond solution.

Most are irrational:  The factory owner who believes that workers are a lower order of human being — stupid, coarse and incapable of learning — is trapped in the 18^th century.  No argument will convince him otherwise.  Since the supplier cannot move from low value-added commodities to high value-added fashion without long term training, there is no possible strategy.

Many self-imposed restrictions are ego driven:

My brand-importing company requires 52 full time designers — a common claim among companies led by designers, who mistake design is important for design is everything.

My Asian buying office requires 10 expatriate German managers — a common claim among some European companies where management is convinced that their nationals alone have a world monopoly on technical skills.

Some few are totally rational:  Your strategy must not reduce the number of local employees.  This is a special case where the client understands that this restriction will limit the possible strategies and will in any event prove costly, but is willing to pay the price.

Rational, irrational or totally insane, these restrictions are real.   In real life, it is these  limitations which usually determines the right strategy, if one exists.

The question is why?

There are three schools of thought each with its own answer

The Living-in-Denial La-La Landers:  2011 has not been a bad year for China.  Exports in units may be down -3% but total value is still 8% above 2010.

This is not  a particularly sensible conclusion.  I certainly do not think those with factories in China find comfort in  an 8% increase when at the same time  their customers are leaving China, taking their orders elsewhere.  And, while its true that so long as U.S. garment imports  were rising, made-in-China garment exports continued to grow, the data shows that this situation is changing for the worse.  Garment imports to the EU are falling sharply while the U.S. appears to be following the same downward path — not good news for made-in-China suppliers.

The It-Serves-You-Right Critics : If Chinese garments are not doing well, the fault lies with the Chinese industry.  In this case higher costs, resulting in higher FOB prices have rendered the industry uncompetitive.

This is my personal favorite. It is short, to the point; and has the added benefit of  following natural justice.  Too bad  the data says otherwise.  It is certainly true that  2011 has brought higher FOB prices for made-in-China garments.  In October 2011 prices for Chinese garments averaged $3.27 compared with $2.85 for the same month in 2010 — an increase of  15%.  However, at the same time the average FOB price from all suppliers rose by 17.4%.  As a result, China’s is becoming more, not less, competitive. October 2011 fob prices compared with its competitors dropped from discount of -4.1%  in 2010 to a discount of -6.1% recorded in October 2011.   When you consider that the Chinese industry is concentrated in better quality fashion­ goods and tends to avoid basic commodities, being at  any discount to world average is remarkable feat.

If you want to see prices increases look at India where between October 2010 and October 2011 average FOB prices rose 22%, Pakistan where in the same period prices were up 23% or Indonesia up 35%, Bangladesh up 37%, or Thailand up 41%.  Compared with these, China is looking pretty good.

All of which leads us to the third and final group

The Silent Minority:  I understand the question.  I have no idea of the answer

Perhaps the most sensible response.

Two years ago, I looked at the same problem and came to yet a fourth conclusion

Herein lies a tale.

“Prolepsis”

In 2009 I was hired jointly by the textile and garment industries in  eight ASEAN countries — Cambodia, Indonesia, Lao, Malaysia, Philippines, Singapore Thailand and Vietnam — to create a strategy to increase exports for the region.   This was the depth of the global recession — when even the major ASEAN garment exporters such as Vietnam, Cambodia and Indonesia were in bad shape, to say nothing of the second level exporting countries. It seemed that China was finally taking over the entire global garment exporting industry, leaving everybody else with the little remaining business that Chinese factories were unable or unwilling to take.

However, it seemed to me that China’s very success might provide a solution to my ASEAN clients’ problems

As China’s global market share approached 40%, the larger retailers and brand-importers were growing increasingly concerned with the size of their made-in-China orders.

Labor costs were rising, and while FOB prices for made-in-China garments remained stable, garment retailers and brand importers were concerned that rising costs would inevitably result in rising prices

To add to the uncertainty, both the U.S. and the EU Governments were growing increasingly critical of China’s trade policies — notably the devaluation of the Chinese RMB as well as other more direct export subsidies.  There was a growing possibility that one or both importing regions would impose anti-dumping and/or countervailing tariffs.

China’s  major customers could not afford to wait for the oncoming disaster.

Imagine you are head of garment sourcing for a major importer.  When disaster strikes the little guys — the  customers who placed 2,000 dozen woven shirts or any orders totaling a few million dollars would have little difficulties finding new suppliers outside China on short notice.  However, you as a large buyer ordering 100,000 dozen shirts per month and/or having outstanding orders totaling a half billion dollars, would be dead. You would require months if not years to build a new supplier base capable of capable of handling your quantities. For you and your fellow big importers, there are no quick fixes.

To avoid the potential catastrophe you would have to move in advance of the disaster, and develop alternative suppliers outside of China.

The ASEAN strategic goal was to prepare the ASEAN textile and garment industries to provide a viable alternative to China:  textile-mill/garment-factory relationships to provide the customer with one-stop shopping, and most importantly a range of services which would allow China’s former customers work more easily and efficiently with their new suppliers.

As expected, in 2011 customers started moving their orders from China to alternate supplying regions.  To some degree, CAFTA and Mexico benefited, but the big winner has been ASEAN.

Surprisingly our predictions were wrong.  The risks of working in China have not materialized.  Wages, overheads and the value of the RMB have all gone up, but none of these have seriously effected prices for made-in-China garments.  At the same time none of the U.S. and EU anti-China rhetoric resulted in Change.

Good news for the ASEAN suppliers:  Reality proved to be of negligible importance.

China’s loss of market share is real even though , the causes of that loss are are perceptions of a reality that remains unfulfilled and may never become realized

The bad new for China:   The perception of  China’s problems remain.  Those concerns are real.  Until the perception changes, China will find a return to dominance very difficult to achieve.

In the old model, factory marketing was totally passive with the customer or his agent approaching potential factory suppliers.  Those deemed reliable — able to ship a decent product on time at a reasonable price — received orders.  Business developed by attrition as customers discarded unreliable factories, distributing their orders among the remaining reliable factories.  Provided your factory shipped a decent product on time, at a competitive price you could count on greater future business.

That model no longer exists.  Today, the ability to ship a decent product on time, at a reasonable price is no longer an asset.  It is an entry level requirement which at best allows a factory to go to end of a very long line of factories all of which meet these minimum standards.

In the new model, the importance of the tangible product has been subordinated  to the intangible process.  Where once the factory’s role in the manufacturing process was limited to garment making,  that role has now has been extended to include every step from designer selects sample fabric to stock garments ready for shipment;  and beyond the manufacturing process to post-production which take us to the final step in the product cycle — last stock garment sold to the consumer.   In this new model, the customer will ask the factory, “which steps are you competent to perform and how much money can your performance save me?”

In the old model factory core competency was defined solely as ability to cut, sew and finish garments.  In that one-dimensional world, every factory could be graded as a point on a single line moving up from least competent to most competent.

In this new multi-dimensional model, the single graded line has given way to an almost infinite array of lines based on range of variables, including product type, customer type, services offered, and services required.

In this new model, to be successful a factory must provide a range of processes in which it excels and which are of value to a particular group of customers.  It is these core competencies which differentiate the successful factory from its less successful competitors.

At the same time each customer must examine their own core competencies to determine what they lack in order to provide their customers with range of products and services they consider necessary to compete in their market.  Retailers and brand importers must overcome these core competency deficits  either internally by developing new competencies or externally by allocating these processes to suppliers who have these core competencies.

In this new model the successful supplier is the factory that is able supplement the limited abilities of their customers to create a comprehensive core value process

In the new model a factory’s ability to fill their customer’s core competency deficits will become the single most important factor differentiating that customer’s  top strategic suppliers from their mid-level normal suppliers to their bottom marginal suppliers.

To operate successfully, factories and mills must radically alter the way they market their products.  The old way — passively standing around waiting for the customer to provide orders — has become the road to failure.

In this new world, you the supplier must take a proactive dynamic approach

Match your core competencies with your customers’ needs

Ø     Define your special abilities — core competencies

Ø     Target a range of customers with complementary needs — core competency deficit

Ø     Work together with your customer to create the greatest mutual benefit — comprehensive core value process — from this combination by:

a. Changing your operation to suit your customers’ requirements thus enhancing your value as a strategic supplier;

b. Persuading your customers to modify their operation thus increasing the value of the relationship by taking maximum advantage of your abilities.

In a period when global trade declines, traditional relationships break down as old  customers and  suppliers go out of business while the survivors — both customers and factories — search for partners able to provide greater value.  This presents a special opportunity for those customers and suppliers who having recognized the need for change are willing make the effort to create that change.

When the global recession finally ends, we will see a new garment industry where the old dominant/subordinate relationship between customer and supplier has been replaced by one of mutual dependency.

To survive each customer and supplier must decide where they stand now and more importantly where they want to stand in the future.

The EU has come calling, begging bowl in hand, to persuade you to lend them money to keep the EURO afloat.  You  currently hold about $3.4 trillion in liquid foreign currency reserves.

Should you lend the EU your money?

There are three good reasons for the Chinese government to provide  support for the EURO

1. The EU is your country’s  largest customer.  If the EURO tanks or the EU goes into recession, your export industry on which the country relies heavily will be badly hurt.

2. You cannot use this money in China.  To repatriate the money you must first convert it from dollars, EURO and Yen, to RMB which would sharply revalue the RMB raising export prices, causing even greater damage to your export industry.

3. You would like nothing more than to diversify your holdings away from the U.S. dollar.  It is really upsetting to use your country’s reserves to support your greatest competitor.  And, the only other currency large enough to deal in trillions is the EURO.

On the other hand, there are serious questions which should be asked and answered before committing your country’s hard earned reserves.

The EU is the world’s largest economy.  Why come begging to you, when the EU can certainly solve their EURO problems using their own resources?

Why aren’t the Germans and the French taking the risk?

More importantly why should China take the risk on  the EURO when the German’s and French  themselves are unwilling?

This is the EU’s  problem.  They know risks better than you.  Perhaps you should follow their deeds not their words

The French and German Governments tell you that your money will be safe because this time the Germans and French  are taking steps to ensure that in future all EURO countries play by the rules limiting the budget imbalances which is the root cause of the present problem.  However, when you think back, was it not those same French and Germans who first broke the rules in 2008?  It seems silly to count on  those who were responsible for the problem in the first place, to ensure that the same problem does not recur.

They tell you that they will bring in the International Monetary Fund (IMF) to guarantee your money.  However, it seems that in recent years the IMF has been hijacked by the EU, giving most of the IMF money (which includes your money) to the EU.  How can you rely on an organization run by the EU and for the EU, to act in China’s interest when that interest may conflicts with EU needs.

The decision is of course yours, but  remember you have a family, position and some real wealth.  You do not want to risk everything on a bad deal which your government does not support, the Party  does not support and the people do not support.

A more important question is,  what should you do after the EU falls into depression and the EURO finally collapses?

Here you would have more positive approach.

The EU is home to many good companies and some very good property.  During a depression when capital dries up and banks are unable or unwilling to provide support, even some of the best assets are cheap.

The money you do not throw away lending to the EU can be used to buy some very good capital assets on the cheap.  For example $3.4 trillion is more than the value of the entire German automobile industry.

Imagine using a part of your money to buy Volkswagen.  You would become a hero to the people and be seen as a great asset to the party.